Stock Report: Netflix (NFLX)

06/05/19 11:46AM EDT

Stock Report: Netflix (NFLX) - HE NFLX table 06 05 19


We believe investors are overestimating Netflix’s (NFLX) pricing power and ability to drive further adoption in the U.S. with looming competition from content goliaths Disney (DIS) and WarnerMedia (T). 

We surveyed 1,000 U.S. consumers, and 40% of Netflix subscribers said they were either 'likely' or 'extremely likely' to subscribe to the Disney+ service. With only so much time in a day and wallet share to be had, an increase in the number of streaming video options will dilute NFLX's relative value, resulting in increased churn and slower subscriber growth.

One of our original thesis points on Netflix is that U.S. subscriber growth will slow faster than what consensus is modeling.  We were modeling U.S. net new paid subs of ~400k for 2Q19, below consensus of ~800k and more or less in-line with management's ~300k guidance. Domestic subscriber estimates have come down following the disappointing Q2 guide.

We believe our below consensus estimates are very generous, and can easily see a situation where U.S. paid subscribers decline QoQ as NFLX faces the limitations of their addressable market, at the same time they are raising price as competition intensifies.

Meanwhile, we believe we are near the end of a positive estimate revision cycle for international sub additions, which was the primary driver of the stock doubling in 2018. With NFLX more than 50% penetrated in key international markets, we see limited upside to consensus estimates and expect net new sub additions to peak in 2019/2020 and begin to decline after that.

Our tracking model for international subscriber growth (0.98 correlation) called for 8.0M net new paid subscribers in 1Q19, which was above consensus of 7.3M.  With the company reporting 7.86M net new paid international subs in 1Q19, we feel really good about our ability to track sub-growth. So far in 2Q19, gross sub additions appear to be trending anywhere from flat to down 15% in key markets, with incremental growth coming from Asia.

Furthermore, the Hedgeye Macro team held a call recently detailing their expectation for the U.S. to enter Quad 4 territory (i.e. an environment of U.S. Growth and Inflation slowing) in 3Q19 followed by a move back into Quad 3 in 4Q19.

Quad 4 is the same environment we experienced in 4Q18, which was characterized by sharp equity drawdowns and an increase in market volatility. When growth and inflation are decelerating (Quad 4), the backtested results suggest underweighting high-beta and momentum style factors. When the quads and our fundamental positioning are in alignment, our conviction often increases significantly and vice-versa.

From a fundamental perspective, the timing of Quad 4 lines up well with our Netflix (NFLX) short. NFLX is a high-beta, high-multiple, leveraged growth stock that we expect will report disappointing Q2 results and Q3 guidance in July 2019.

For more detail on our Netflix call, check out Communications analyst Andrew Freedman's 49-minute presentation outlining his NFLX short thesis (along with analysis of his Pinterest (PINS) long call). CLICK HERE to watch.

Stock Report: Netflix (NFLX) - nflx image


Stock Report: Netflix (NFLX) - HE NFLX chart 06 05 19

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