- New red flag or blip? The miss in 2Q sub adds isn't really all that concerning, but the trend in marketing spend against it is a bit of a concern. Historically speaking, NFLX tends to jack up marketing spend as US sub growth is stalling, often times to no avail as the US is highly penetrated, so incremental marketing spend doesn't do that much. On the other hand, int'l sub growth and marketing spend historically move together for the opposite reason, but that relationship broke down for the first time in 2Q18. Too early to say whether this is an ominous sign, or a random anomaly in the relationship, but something to monitor moving forward given its longer-term implications.
- Cash contribution profit remained solidly positive: We model NFLX on a cash basis (vs. amortization basis) since its cash content outlays profile more as recurring operating expenses given its accelerated content amortization. Cash contribution profit remained in positive territory in 2Q18 despite both rising content expenditures and accelerating marketing spend. The improved trajectory is encouraging for the longer-term bull case since it reverses what had been a near-steady deceleration in the metric since 2014. However, cash-based EBITDA remains deep in the red.
- Remains too risky to short. While the shorts were somewhat validated off this print, most are probably all still under water given that NFLX was up over 100% YTD into the print...and on pretty much nothing. Further, the sub miss may actually be a bullish indicator since consensus sub estimates will likely come in for at least the remainder of the year, if not further out, so there may not be any short catalysts on the horizon. Remember, there isn't a company with a lower hurdle on the street since all NFLX has to do is beat the sub number, and its fundamentals won't matter until the capital markets start drying up. All said, not worth it.
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