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Netflix's Cash Burn Continues, Stock Expensive

Neil Macker, CFA

Netflix posted a very strong quarter in terms of subscriber growth as the firm handily beat its guidance, but we still shares as overvalued today.

The better than expected increase in international subscribers meant that both revenue and segment contribution came in above our projections. However, the firm continues to burn cash at a faster pace with a free cash flow loss of over $2 billion in 2017 versus a loss of over $1.7 billion last year. Management expects the free cash flow burn for 2018 to increase to $3 billion to $4 billion. 

Despite the beat on subscribers, our long-term thesis for the stock remains largely in place as we expect management to have to continue to invest heavily in content to keep users happy. We're retaining our narrow moat rating and raising our fair value estimate to $90 from $80 to account for slightly faster subscriber growth, a lower tax rate, and the time value of money.