The video streaming firm fell short of its subscriber guidance and we think continued investment in content will pressure margins over time.
By Neil Macker, CFA | 04-18-17 | 02:00 AM | Email Article

 Netflix posted a mixed beginning to 2017 as the firm missed its subscriber guidance but beat our projections for revenue and segment contribution. The firm posted weaker-than-expected subscriber growth in both the international (3.53 million net adds, versus guidance of 3.70 million) and U.S. segments (1.42 million net adds, versus guidance of 1.50 million). Despite the miss, the firm issued better-than-expected subscriber guidance for the second quarter. Netflix continues to expand its streaming base, ending the quarter with more than 94.36 million global paid subscribers, up from 77.71 million a year ago. We retain our narrow moat rating and our $73 fair value estimate.

Neil Macker, CFA, is an equity analyst for Morningstar.

U.S. paid subscribers continued to grow at a slower pace than we previously projected, with trailing 12-month paid net adds at 3.7 million in the quarter, down 32% from 5.4 million at the end of first-quarter 2016, which was down 9% versus 2015. While we project net subscriber growth to slow, the current results were surprising in light of the strong 1.93 million total net adds in the U.S. in the previous quarter. We currently model a 17% average annual decline in total U.S. net adds from 2017 to 2021 with a 21% decrease in 2017, but our projections (and consensus) may prove optimistic and problematic for the firm. Since management has attributed net add outperformance to excitement around original content, Netflix will need to continue ramping up its investment in original content at the expense of acquired content, possibly increasing pressure on margins.

Management spent time discussing the increasing competition in Internet TV, including the news that  Amazon will take over  Twitter’s role in streaming the Thursday night NFL games. The firm continues to insist that Netflix will remain focused on streaming video on demand and has no interest in adding ad-supported live streaming. Management also reiterated that its service complements both traditional and over-the-top pay television bundles.

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Neil Macker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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