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Equity Research – Netflix

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Equity Research – Netflix

NETFLIX, Inc (NFLX)

Based in California, Netflix, Inc provides susbcription streaming service (Films, TV Series, documentaries) across various genres and languages. A business split in 2 main regional segments:
– International Streaming
– United States and Canada Streaming
NFLX sales grew by 28% in 2019 to $20.1 Bn, linked to the the addition new members subscribing to its streaming services, over 167 M members worldwide in 2019, up 26% y/y (over 100 M paid members accounts outside the United States) Adding to that, top franchise series released in 2019 (The Witcher, Stranger Things, 13 Reasons Why…) generating a large fanbase
worldwide. Consequently, operating income and net income grow at a faster pace over the years: accounting for 13% and 9% respectively. Earnings set to be reinvested with substantial spending on content (in addition to $10 Bn in debt), as well as strong marketing to promote its originals.

As NFLX delivered results during FY2019, Q1-20 and Q2-20 earnings are strong, adding another 26M paid newcomers reaching over 193M paid members worldwide. Quarantine and self-distancing measures have managed to boost the growth of its susbcribers from March-20 to June-20. As such revenue both Q1-20 and Q2-20 grew on average by 26% y/y to $5.7 Bn and $6.1 Bn respectively. Substantial growth come from the international streaming segment, up 38% y/y. In comparison, growth is sluggish in the North America region (up 12% y/y) due to a price / content war between “internet entertainers” such as Amazon Prime, Disney+(60M monthly subs), Hulu (30M monthly subs), and even TikTok (with over 100M monthly active users in the US).

Within a competitive industry, the goal is clear, maintaining focus on the improvement of its streaming service platform, as well as its content with TV shows and movies rights (in which the firm acquired). As both operating and net income growing at a faster pace (30% on average), over the quarters, has helped freeing up positive cash flows (+$899 M for Q2-20), with the intent of investing massively in content production. By Q3-20, revenues are expected to reach $6.3-$6.4 Bn range (up 22% y/y) with the addition of 3M paid members, with the improvement of both operating and net margin accounting for 20% and 12%.
SHARE PRICE – Since January 2020, the stock gained 65%. The share price (07/10/2020) closed at $534.66 per share.
A stock pushed by stronger results and higher demand for entertainment given the market conditions (stay-at-home
period). A clear strategy focusing on spending on content (production and the acquisition of copyrights), and its services for business and with the expectation to reach over $25 Bn in net revenue (23%-25% growth for FY-2020) and expect to reach over 200M paid members worldwide, overall by keeping a 14% in operating margin (to $3.5 Bn). In addition, the improvement of its free cash flow to breakeven- positive at the end of 2020, As such, shares that will likely move at its own pace around $550-570 per share.

Written on 08/10/2020

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