Netflix Reaching Critical Mass With Consumers, Still A Top Pick At RBC

Netflix, Inc. NFLX reported stronger-than-expected Q4 EPS, with the results beating expectations both in terms of profits and subscribers.

RBC Capital’s Mark S.F. Mahaney maintains an Outperform rating on the company, while raising the price target from $150 to $175.

‘Better Than Strong’

Stating that Netflix was still the No. 1 pick, the analyst mentioned that the Q4 results meaningfully beat the already high expectations, with the company reporting revenue of $2.48 billion and GAAP EPS of $0.15.

Mahaney explained that the 8 percent after-market rally was driven by a triple subscriber beat, with domestic additions of 1.93 million, international additions of 5.12 million and Q1 guidance of international additions of 3.70 million.

In addition, Netflix reported record high U.S. contribution margin of 38 percent for Q4, while guiding to 41 percent in Q1, with international profitability growing $16 million in Q1.

Critical Mass

“Netflix is reaching critical mass with consumers in an increasing number of countries based on its User Experience, Content & Pricing. And although it faced elevated churn in mid-‘16 due to price increases, it did succeed with the price increase,” Mahaney pointed out.

However, the analyst also noted that cash burn continued to be high, with free cash flow expected at -$2 billion in 2017, although this was likely to the peak burn year.

On the other hand, operating margins are expected to consistently grow from 4 percent in 2016 to 7 percent in 2017 and 9 percent in 2019.