MKM Not Overly Concerned With Netflix's Near-Term Sub Ramp Controversy

Rob Sanderson of MKM Partners thinks Netflix, Inc. NFLX has been the most controversial Internet large-cap this quarter.

Sanderson offered five controversial points in a research note on Thursday:

1. Many investors believe estimates for the international ramp did not come down enough
2. Ongoing concerns over price increases and churn impact on net subscriber additions
3. Third-party data has been discouraging
4. Management previously brushed off Olympic related concerns, but is now mentioned as a third quarter drag
5. Predicting subscriber numbers is always a "black-box," and the stock is highly volatile around earnings reports

However, this doesn't necessarily mean investors should be concerned — Sanderson himself isn't for several reasons.

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Stymie Your Concern

First, last year's second-quarter international paid additions benefited from the launch in Australia and New Zealand. Second, the third quarter is normally a "seasonally up quarter," and this year has 270 million more broadband homes that will experience a seasonal lift.

Moving on, Sanderson suggested that Netflix's management team has traditionally been conservative in forecasting international net additions and has exceeded its guidance by 12 percent on average over the past 13 quarters.

On the other hand, the analyst stated that Netflix's management did not communicate the first-quarter surge and second-quarter decay very well, but are now being "extra mindful" in managing expectations.

Finally, Sanderson stated that third party data has never been consistent and is often misleading, while trends will likely return to normal immediately following the Olympics.

"We have a very positive long-term view on the stock and believe the market cap has potential to triple in 4–5 years," Sanderson concluded. "The Bull case depends on significant subscriber growth and with little near-term earnings power, valuation is highly sensitive to adoption trajectory. This is not a linear path and quarterly fluctuations are hard to call."

Shares remain Buy rated with an unchanged $145 price target.