Netflix Benefits as Viewers Stay at Home

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.

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