There were a lot of big numbers in Netflix’s third-quarter earnings release Monday night which mostly pleased analysts, but also inspired a word or two of caution.
“For the record, Netflix has now added 15 million members in calendar 2017—25% more than Hulu has acquired in its entire 8-year existence, “noted Todd Juenger of Sanford C. Bernstein.
Juenger notes that Netflix now has 109 million global subs and is growing at double digits. He calculated that every 7.5 million subs translates into incremental revenue of $1 billion. He notes that Netflix is taking that revenue and re-investing in content.
That investment will lead to more subs, and Juenger is forecasting Netflix will eventually exceed 300 million subscribers.
Michael Nathanson of MoffettNathanson Research summarizes Wall Street’s view of Netflix versus traditional TV. “Short media and long Netflix,” he says. “Given the basket of deplorable 2017 media data points juxtaposed with Netflix’s 30% revenue growth, improving operating margins and recent price hikes, this pair trade continues to make investors rich,”
But some of Netflix’s numbers concern Nathanson.
2018 program amortization will be between $7 and $8 billion vs. Nathanson’s prior estimate of $7.3 billion;
U.S. year-to-date marketing costs of $358 million are up 20% as Netflix establishes its own original brands vs relying on off-network content that has an established following
Free ash flow burn next year wil be higher than the $2 to $2.5 billion in 2017
Despite those warning signs, Nathanson raised his target price for Netflix stock by $10 to $150.
Analysts also noted that Netflix CEO Reed Hastings delivered the big numbers in an ugly Christmas sweater—a peculiar dividend of the company’s spending on original programming.
“The growth of owned IP like Stranger Things and the acquisition of MillarWorld open up new potential revenue streams over the long term, but to date,” said Daniel Salmon of BMO Capital Markets. “Netflix is only pursuing some small licensing opportunities like Stranger Things 'ugly sweaters' at Target, which we see as much as marketing leverage as revenue drivers today.”