Netflix Q1 2019

The first Vestact recommended stock to come out with quarterly results was JP Morgan. The second, out yesterday, was Netflix. The video streaming giant reported revenue of $4.52 billion, up 22.2% year-on-year.

Netflix currently has 149 million subscribers (and a good deal more who watch using someone else's password). Of those, 60 million are in the US and the other 89 million are in the rest of the world.

Total subscriber additions in this three month period were 9.6 million, which was ahead of consensus of 8.9 million. The company expects to add another 5 million in this second quarter, currently underway. Netflix is gradually raising prices and pushing families to pay for multiple-user logon rights. Average revenue per subscriber is currently $11.64.

Netflix has found a close correlation between content spend and subscriber net additions. In recent times they had big hits with Umbrella Academy (watched by 45 million member households) and movies like Bird Box and The Highwaymen. The documentary feature FYRE: The Greatest Party That Never Happened was watched by over 20 million member households in its first month. An ambitious nature documentary series narrated by Sir David Attenborough called Our Planet has just been launched, and is expected to be watched by over 25 million member households in the first month of release. Alfonso Cuarón won an Oscar for the amazing movie Roma, which also won for Best Foreign Language Feature. Watch it!



Netflix has a fat pipeline of new content coming later this year, including new seasons of prior series hits such as Stranger Things (July 4th), 13 Reasons Why, Orange is the New Black, The Crown and La Casa de Papel (aka Money Heist) as well as big films like Michael Bay's Six Underground and Martin Scorsese's The Irishman.

What about the competition? This is what Netflix management said in its letter to investors last night:

"Recently, Apple and Disney each unveiled their direct-to-consumer subscription video services. Both companies are world class consumer brands and we're excited to compete; the clear beneficiaries will be content creators and consumers who will reap the rewards of many companies vying to provide a great video experience for audiences. We don't anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings. We believe we'll all continue to grow as we each invest more in content and improve our service and as consumers continue to migrate away from linear viewing (similar to how US cable networks collectively grew for years as viewing shifted from broadcast networks during the 1980s and 1990s). We believe there is vast demand for watching great TV and movies and Netflix only satisfies a small portion of that demand."

Netflix is also changing the way that TV and movie content is financed. The company snaps up the most sought-after scripts and ideas, often signing longer-lasting rights deals than traditional broadcasters and staggering payments for shows over several years. According to the FT, over the next five years Netflix will drip-feed a total of $19.3 billion to producers for new shows and to license TV that has already been made. Producers are financing their own projects with longer-term (three to four year) loans from banks like Barclays, JPMorgan and City National Bank of Los Angeles.

Why buy Netflix shares? They are not cheap, at first glance. At a market capitalisation of $157 billion they trade on an eyewatering 137 times earnings. No dividends. High debt levels! The all-time high share price was $423, reached momentarily back in June 2018. They are at $359 per share now.

You should buy them because we believe that Netflix is at a key point in its evolution, where its profitability is about to skyrocket. As their content investments, distribution partnerships and marketing spend drive subscriber growth significantly above consensus expectations and the company raises its average revenue per subscriber, the valuation will improve. Come on, do it.