KEY POINTS
- BEST DOG WALKER ON THE STREET: Mgmt has done a great job of keeping a tight leash on the sell-side before they make a mess on the buy-side’s lawn. Mgmt has been walking the sell-side down off their 1H17 estimates before it had to own up to them. Mgmt rebased 1Q17 estimates on the 3Q16 print, but it eventually missed them anyway (Point 2). 2Q17 global sub-adds estimates were supposedly rebased during some post-interview follow-up call with the sell-side that we’re not privy to. In short, the upside to the 2Q sub guide is mostly a reflection of rebased estimates.
- SIMPLE BUT SMART MOVE: Pushing House of Cards into 2Q. Sounds stupid but it literally defined the print, if not the year. It’s this simple, NFLX pushed arguably its most popular series into the last month of its seasonally weakest quarter. So instead of potentially printing a y/y decline in total US subs in 2Q, which was one of things we were playing for, mgmt ate it in 1Q in the form of a miss vs. its sub guide in its seasonally strongest quarter. Even if those subs churn off after binging through House of Cards, the earliest we'll see that is 3Q17, which is a seasonally stronger quarter, so less likely that NFLX prints a decline in its US sub base.
- NOW WHAT? The primary focus of our short was 1H17, but mgmt effectively neutralized all of our catalysts (point 1+2). Now we're mulling whether we want to stay with our short into 2H17. It looks like the bulk of sell-side estimate revisions are in; the positive is that we're not seeing a comparable level cuts to consensus sub-add estimates as we did following the last two prints. Further, the last two prints validated much of our thesis, which means the fundamentals may actually start to matter in 2H17. We may duck out of the short temporarily, but likely coming back before one of the next two prints.
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
