Netflix Posts Strong International Subscriber Growth

Netflix NFLX ended 2019 with stronger-than-expected international subscriber growth but lower U.S. subscriber net adds than the previous guidance. While revenue met our expectations, segment operating margin came in below our projections. The free cash flow loss for the quarter was a record $1.7 billion, raising the loss for the year to just under $3.3 billion (16% of total revenue). While the firm expects to “only” lose $2.5 billion in 2020, we think that it will continue to burn cash on annual basis for at least the next three years.

We are retaining our narrow moat rating and are raising our FVE to $150 from $135, primarily from incorporating faster international customer growth, albeit at lower average revenue per user as Netflix rolls out cheaper plans to compete in emerging markets. We believe the combination of market saturation, competition, price sensitivity, and lack of compelling new series will continue to weigh on net additions as seen over the last three quarters, and limit the level and number of price increases that the firm can implement. We also expect that the stronger competition in the U.S. and internationally will necessitate continuing increases in content and marketing spending, which would result in continued cash burn and limited margin expansion over the next five years. In short, we still believe Netflix’s current share price does not consider the potential changes to consumer behavior that a combination of higher prices and increased competition could create, to the detriment of the core business.

Revenue of $5.5 billion came in line with our estimate. Netflix posted stronger-than-expected subscriber growth in the international segment (8.3 million net adds versus guidance of 7.0 million) but slower growth in the U.S. (0.4 million net adds, versus guidance of 0.6 million). Netflix continues to expand its streaming base, ending the quarter with more than 167 million global paid subscribers, up from 139 million a year ago.

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