SunTrust's Bob Peck Discusses Netflix's 'Across The Board Beat'
SunTrust’s Bob Peck still remains on sidelines on Netflix, Inc. (NASDAQ: NFLX), despite the company’s strong third-quarter subscriber growth on the back of original content, which more than offset any impact of ungrandfathering and the Olympics.
“While we roll out 2017 year-end PT of $115 (from $100), we maintain Hold on: 1) lower FCF from increasing investment in original content with higher upfront cash costs, driven by competition and the need to localize, 2) intensifying diverse competition for screen time, and 3) premium valuation,” Peck wrote in a note.
The $115 target implies about 40x 2018 EBITDA and about 60x P/E.
The company’s third-quarter int'l/domestic paid net adds of 2.91 million/0.48 million beat consensus of 2.0 million/0.29 million, which mgm't attributed to new original content ("Stranger Things," "Narcos") and in-line churn.
For the fourth quarter, Netflix’ guidance was better than expected on all counts, but it cautioned on tougher comps from 4Q'15 rollout in Spain, Portugal and Italy. For the first quarter 2017, Netflix noted the Street may be optimistic given the lapping of the global launch from 1Q'16, when net adds benefited from pent up demand.
“In China, NFLX plans to license content to local providers, but the revenue opportunity may be modest,” Peck noted.
Netflix is accelerating its investment in original content and target 1,000 hours in 2017 versus >600 hours in 2016. Content obligations increased about $1 billion q/q to about $14 billion in the third quarter.
The company plans to spend about $6 billion on content in 2017, up 20 percent year-over-year. However, the increasing investments in original content are expected to weigh on cash flow.
Meanwhile, Peck raised his fourth-quarter forecast for total paid sub adds/revenue/EBITDA to 4.5 million/$2.47 billion/$176 million from 3.9 million/$2.44 billion/$154 million.
Shares of Netflix closed Monday’s trading at $99.80. In the pre-market hours Tuesday, the stock is up 18 percent to $117.76.
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