Raising Netflix’s Fair Value But Shares Still Expensive

Netflix NFLX posted an in line end to 2021 as revenue matched our projection and subscriber additions came in just below our expectations. Shares fell by 20% in after-hours trading as management only expects to add 2.5 million customers in the first quarter (versus 4.0 million in 2021), which would be the slowest start to a year since the streaming service was spun out in 2011. We continue to think the lower subscriber guidance reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth, such as India. We maintain our narrow moat and raise our fair value estimate to $305 from $275 to account for slightly stronger margin expansion expectations and faster than previously projected price increases in the U.S.

Netflix added 8.3 million net subscribers during the quarter versus guidance of 8.5 million, ending 2021 with almost 223 million global subscribers, up 4% sequentially and up 9% from a year ago. With 1.2 million net additions in the U.S., growth was ahead of our expectations likely due to the strong content slate, but the firm still only added 1.3 million subscribers in the region during 2021. Latin America also posted anemic growth, with 1.0 million net adds in the quarter and only 2.4 million in 2021, well below the results in 2020 (6.1 million) and 2019 (5.3 million).

Revenue of $7.7 billion, up 16%, was in line with our estimate. U.S. revenue grew by 13% year over year. Average revenue per customer for the region was up 9% versus a year ago to $14.78, implying that most customers are on the standard HD plan with a growing share on the 4K plan. The price increases announced on Jan. 14 make the HD ($15.49 per month) and 4K ($20) plans the two most expensive streaming offers in the U.S., ahead of HBO Max at $15 per month. Our updated model now projects Netflix will raise prices every 18 months in the U.S. to spark top line growth. We think these increases will exacerbate the lackluster customer additions.

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