Skip to Content
Stock Analyst Update

Netflix Benefits as Viewers Stay at Home

Despite subscriber additions ahead of our estimate, revenue for the narrow-moat company was only 1% ahead of our projections for the first quarter.

Mentioned:

Netflix (NFLX) kicked off 2020 with impressive subscriber growth as people stayed home during the COVID-19 outbreak. Despite subscriber additions well ahead our estimate, revenue was only 1% ahead of our projections for the first quarter. We view much of the subscriber beat as a pull-forward of longer-term growth and expect the global rollout of Disney+ and launches of Peacock and HBO Max to increase churn. However, we are raising our fair value estimate to $160 from $150 to account for the revenue impact of the larger sub base.

Netflix posted much stronger-than-expected subscriber growth (15.8 million net adds versus guidance of 7.0 million). The company no longer provides guidance for domestic and international net adds. Netflix continued to expand its streaming base, ending the quarter with more than 183 million global paid subscribers, up from 149 million a year ago. Growth in the quarter was spread across the four global regions, with the three non-U.S. regions all posting their largest net adds in the last 13 quarters. While the U.S. region did increase by 2.3 million new members, Netflix posted 2.5 million net adds in the U.S. in the first quarter of 2018. This inability to beat the first quarter of two years ago despite the impact of COVID-19 reinforces our belief that adding and retaining marginal subscribers in the U.S. is becoming increasingly challenging for Netflix. 

Free cash flow for the quarter was $162 million due in part to the shutdown of productions around the world. While management did lower its 2020 free cash flow loss guidance to $1 billion from $2.5 billion, it continued to point to a multiyear path to annual positive free cash flow, and we expect that the 2021 loss will likely hit the original 2020 guidance. Management may be correct that 2019 will remain the high point in terms of losses, but the new outlook for a lumpier and less linear multiyear path to positive free cash flow even after 2021 should give investors pause.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.