The firm ended 2016 on a high note, but the stock is trading well above our fair value estimate and uncertainty remains very high.
ended 2016 on a high note with stronger international subscriber growth (5.12 million net adds, versus guidance of 3.75 million) and U.S. growth (1.93 million net adds, versus guidance of 1.45 million). Despite the impressive fourth quarter and better-than-expected guidance for next quarter, the most important information from the conference call may have been management’s admission that the operating margin will improve modestly on a yearly basis, as opposed to a "hockey stick manner." Our long-term model for the company still projects that the operating margin for the international segment will improve slowly but will remain well below that of the U.S. segment over the next five years. We retain our narrow moat rating and are modestly increasing our fair value estimate to $73 from $69 to account for the time value of money from rolling our model forward and an additional year of margin expansion for the international segment. With shares trading well above our new fair value estimate, we advise investors to steer clear of this very high uncertainty company.
Neil Macker, CFA, is an equity analyst for Morningstar.
Netflix continues to expand its streaming base, ending the quarter with 89.1 million global paid subscribers, up from 70.8 million a year ago. The international expansion continues to track ahead of expectations on the subscriber side, as Netflix now has 41.2 million paid international streaming subscribers, up from 36.8 million last quarter and 27.4 million a year ago. Revenue and total segment contribution came in above our expectations as the U.S. segment continues to benefit from the firm’s recent price increases. Average revenue per user in the U.S. improved by 15% year over year to $9.91 per month. Marketing as a percentage of revenue for the U.S. came in at 7.5%, up 30 basis points from the year-ago quarter. We will continue to monitor this line item, as the firm may need to ramp up its marketing spend to build up awareness of its library, which is increasingly skewed toward original content.
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