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Clare Mac Carthy
US markets are closed to mark Independence Day but in the background, the drumbeat of global trade wars continues to rumble, undermining the yuan and Chinese equities, sparking fears of contagion across fixed income and dragging a major tech company onto the battlefield.
Article / 17 April 2018 at 12:38 GMT

Netflix steamrolls competition to create world dominance in streaming

Head of Equity Strategy / Saxo Bank
Denmark
Netflix delivered stellar Q1 earnings last night after the US market close. Here is the quick take...

  • EPS $0.64 in line with estimates
  • Revenue $3.7 billion, in line with estimates and up 40% y/y
  • EBITDA $465 million, up 71% y/y and much higher than estimated
  • Subscribers grew to 125m growing at 25% y/y
  • Average selling price grew 14% y/y
  • Free cash flow $-285m and expected to worsen in 2018
  • Net debt around $4bn
  • Streaming content obligations rose to $17.9bn up from $15.3bn a year ago

Netflix subscribers
Source: Recode 

The key take-away from Netflix's Q1 result is the leverage factor in the business model which is beginning to show strength. 12-month trailing EBITDA rose to $1.1bn increasing the EBITDA margin to 8.7% up from 6.8% a year ago and 4.1% in Q2 2016. 

It is obvious now to investors that Netflix's big international push is paying off.

Netflix ebitda



















The big question is what the overall potential is. Naturally, Netflix cannot continue to accelerate its growth rate so it would be obvious to expect this metric to begin declining as the international expansion matures. 

What the upper limit in terms of subscriptions? Netflix typically sells one subscription per household so Netflix will never get Facebook or Apple numbers. But the stickiness of its customers and the life-time value is likely increasing over time as the content universe expands and gives customers little reason to unsubscribe. 

Our ballpark estimate is that Netflix could grow its subscriber base to around 300m before the market gets saturated. If the average household has 2.5 persons, then that is a reach of 750m viewers.

EV/EBITDA



















Valuation has always been the big concern on Netflix and the main angle for hedge funds to short Netflix shares. So far ,the short trade has been terrible with Netflix riding the momentum wave to over $300/share up from $50 in early 2015. 

With an EV/EBITDA ratio at 120x Netflix is without question the most expensive US large cap technology stock so it obviously begs the question about the risk-reward ratio going forward. 

On a long enough time horizon, we know that valuation is inversely linked to performance (there are, of course, exceptions to the rule). The reason why investors are willing to pay such a steep premium for the shares is that the fact that Netflix is likely to dominate streaming content for the next decade with no apparent competitor really in a position to threaten that outlook.

Netflix weekly share price since Q4 2013:
Netflix share price
Source: Saxo Bank 

As we head into the New York open, it appears that investors are cheering Netflix's Q1 result and it seems it has become an excuse to buy into the equity market for now.

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

17 April
JJb JJb
This comment has been redacted
17 April
fxtime fxtime
This comment has been redacted
17 April
fxtime fxtime
Well this is a first for me !! Being redacted for suggesting caution with netflix accounts !!
17 April
ReTrade ReTrade
I was going to comment as once a prominent member on this site was redacted.
17 April
fxtime fxtime
LOL.... I don't think I was rude/abusive and my comments were merely about how large an economy of scale is required by Netflix to at least have a positive cash flow !
17 April
ReTrade ReTrade
There´s little value here left, once a decent site.
17 April
fxtime fxtime
Give them time...their new format has only just started for Internal commentary/analysis. We might all grow to prefer the new format :-)
17 April
Alan M Alan M
There is still great webinars and morning updates, still one of my primary sources
17 April
ReTrade ReTrade
Mr.Jakobsen heralds a recession since 2014 , when mkt dips 5%, always a good buying opportunity IMO. And one critical/neutral real opinion redacted within 5min.
18 April
Patto Patto
Sounds like fxtime is a cheerleader for Saxobank...........yes, we should wait and see how this cut back site performs but it looks to me like it will be very "corporate" with all the interesting characters having been given the push. Presumably there must be method in the madness....unless it's just cost-cutting.
18 April
fxtime fxtime
LOL..I have never thought of me as a cheerleader LOL. As I don't work for Saxo I can't comment on their behalf.

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