KEY POINTS
- 2Q17 = DEFIED GRAVITY: NFLX somehow pulled off sequential growth in int'l net adds from its seasonally strongest quarter to its seasonally weakest quarter, which has literally never happened in its reported history. Mgmt didn't offer any incremental details as to what drove that outperformance. We can't tell from its reported metrics whether there was more promotional activity since FXN Int'l ARPU improved, which if so could have been masked by a combination of sub mix and ungrandfathering. Further, it doesn't appear like there was excessive marketing activity in the quarter since Int'l sub acquisition costs (SAC) meaningfully declined on a y/y basis, which makes us think that some of its upside may have come from partnerships/bundling agreements (e.g. Altice/SFR France). Note that our tracker can't pick up memberships sourced from 3rd parties, so we will be looking for a supplement to our original tracker moving forward. Meanwhile, US sub adds also hit an all-time reported high for 2Q, also with declining SAC. All in, the print was too good to make sense.
- COVERING SHORT: There's no point in hanging around on the short, especially given the lack of clarity on what drove NFLX's 2Q upside, and the likely post-print follow-through on the stock, which is where the bulk of the pain on this short has come from. Further, this print was really our last stand since we never thought there was much to play for following its seasonally weakest quarters, especially since consensus 2018 sub-add estimates (as of yesterday) are now calling for declines, which wasn't the case as recently as last week when we published our prior note. That said, NFLX may actually have a bullish bias into 2018 since there's no telling when/if NFLX's fundamental prospects will actually start to matter to the street, which means it's not even worth discussing moving forward. As long as mgmt can continue to jump in front of consensus sub-add estimates, it can continue to keep the dream alive, which means it can continue to get Wall Street to subsidize its model indefinitely.
Let us know if you have any questions or would like to discuss further.
