Netflix Reports Mixed Subscriber Growth

Netflix NFLX posted a mixed third quarter, as subscriber growth came in slightly below guidance and our expectations, but revenue was just ahead of our projections. The firm burned $551 million during the quarter, down from a loss of $859 million a year ago. However, management maintained its 2019 free cash flow loss target of $3.5 billion, implying a cash burn of $1.9 billion in the fourth quarter which would be a single quarter record. While continuing to insist the cash burn will decrease in 2020, management admitted that Netflix will move “slowly” toward positive free cash flow. We are retaining our narrow moat rating and fair value estimate of $135.

Netflix’s streaming subscriber base continues to grow, ending the quarter at more than 158 million global paid subscribers, up from 130 million a year ago. Subscriber growth in the U.S. was weaker than expected (0.52 million net additions versus guidance of 0.80 million) while the international segment came in just ahead of guidance (6.3 million net adds versus guidance of 6.2 million).

The continued slowdown in U.S. growth reinforces our belief that adding and retaining the marginal subscriber is becoming increasingly challenging for Netflix. Monthly revenue per paid U.S. member increased 16% versus a year ago to $13.32, due largely to recent price increases, which have been phased in completely in the U.S. Management noted that customer disconnects remained elevated during the quarter, reinforcing our hypothesis of some price sensitivity among marginal subscribers, with a less price-sensitive core user base. However, we still expect that coming competition with lower-price plans will test the price sensitivity for these core users--both Apple TV+ and Disney+ will launch in November, with HBO Max and Peacock from NBCUniversal following next spring. Feeding these services has also driven up content costs, as management indicated that the cost to develop premium content has increased about 30% over the past year.

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