Netflix, the American streaming and entertainment company, reported earnings earlier this week, and the stock jumped as much as 20% in after hours trading as international subscriber growth sharply exceeded guidance.
Hesham Shaaban, Hedgeye’s Internet and Media analyst summarized the good and bad of the company’s earnings.
THE GOOD
- NFLX put a lot of concerns to bed by producing a strong re-acceleration in net sub additions in both the US and Int’l markets and guiding ahead of the street for both segments in 4Q.
- Int’l net adds reaccelerated from negative to positive growth in 3Q, and sub acquisition cost decelerated on a y/y basis despite a considerable acceleration in marketing spend.
- The bigger surprise was the US, where the decline in net sub adds moderated despite 75% of its grandfathered US accounts stepping into a price increase during the quarter.
THE BAD
- US Marketing expense increased 45% y/y (vs. 18% in 2Q), translating to sub acquisition costs (SAC) up over 200% on y/y basis (comparable to 2Q). NFLX could eventually be walking into a situation where it could cost more to acquire its subs than the revenue it earns from them.
- Content costs are continuing to ramp aggressively. We estimate that NFLX’s cash content expenditures essentially negated its revenue during the quarter
- NFLX burned through roughly 25% of its cash this quarter. It’s ability to drive subscriber and/or content growth will be dependent on how much cash it raise in the debt markets, which we suspect will be a recurring theme
BOTTOM LINE
Near-term trends look a lot better than subdued consensus estimates into the print, particularly in the US given the headwinds facing the segment in 3Q. NFLX's fundamental prospects took a turn for the worse this quarter, but we can't play that part of the story unless we see corresponding near-term pressure on its sub metrics.
We were originally targeting an entry point on the short side ahead of the 4Q print as play on 1H17 net adds, but management surprisingly called out 1Q consensus estimates during yesterday’s call as being lofty, so we need to monitor consensus estimates from here to see if we still have a short catalyst heading into 4Q. If not, we may entertain the other side of the trade depending how our tracker trends from here.
Follow @HedgeyeInternet for updates.
