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Netflix Inc (NFLX) Common Stock US$0.001

Sell:$361.75 Buy:$362.00 Change: $8.32 (2.25%)
NASDAQ:1.53%
Market closed |  Prices as at close on 3 April 2020 | Switch to live prices |
Sell:$361.75
Buy:$362.00
Change: $8.32 (2.25%)
Market closed |  Prices as at close on 3 April 2020 | Switch to live prices |
Sell:$361.75
Buy:$362.00
Change: $8.32 (2.25%)
Market closed |  Prices as at close on 3 April 2020 | Switch to live prices |
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (22 January 2020)

Netflix added a higher than expected number of subscriptions in the fourth quarter, and ignoring the impact of exchange rates, average revenue per user rose 12%. That resulted in a 30.6% increase in revenue to $5.5bn.

Higher costs meant operating income was below previous guidance at $459m, however the group did reach its target of 13% operating margins for the full year.

The shares rose 2.3% in pre-market trading.

View the latest Netflix share price and how to deal

Our view

Netflix continues to deliver show stopping revenue growth. That's driven by millions of extra subscribers every quarter, helped along by price hikes in some of its core markets.

Expectations are high though. The business model demands that Netflix builds scale and spreads costs over a larger customer base, to that end subscriber numbers are still very much the metric to watch.

These have been more positive lately, but that's not to say the coast is clear. Convincing people to sign up to Netflix has become trickier. Rivals like Amazon and Apple have arrived on the scene, and the recent launch of Disney+ has seen a positive response.

Combined, these intruders have the ability to steal the spotlight, and market share in the process. So it's slightly concerning to see increased levels of churn in the US, although viewing per membership was actually up last quarter, suggesting those who are sticking with Netflix are liking what's being put in front of them.

Adding new customers and keeping existing audiences entertained, means Netflix is having to spend heavily on marketing, while the content budget has burst past $13bn a year. This includes making Netflix originals - think Stranger Things and The Irishman - and licenced content from other production houses.

All that spending means Netflix is burning through cash. So far it's been able to plug the gap with affordably priced debt because the market is optimistic it'll be taking in more than it spends in the not-too-distant future. If that happens cash flow could improve rapidly, explaining the shares' premium valuation of 59.5 times expected earnings, prior to the most recent set of results.

We're prepared to give Netflix the benefit of the doubt for now. We suspect there's further room for the group to increase its prices. Netflix viewing time is still dwarfed by conventional TV, so there's plenty of scope for users to get better value for money as streaming increases its share.

Looking ahead we'll be keeping an eye on the impact of competition. If Netflix is forced to ramp up content spending to keep hold of existing customers, rather than chasing new ones, it wouldn't be the best news - especially for what's supposed to be a stellar growth stock. For now, the group's holding onto its head start in the streaming world, but the journey isn't over.

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Fourth quarter trading details

The group added 8.8m new subscriptions in the fourth quarter, ahead of market expectations of 7.8m. That included 8.3m net new additions from international markets, which was also ahead of expectations.

Increased streaming competition and higher prices had more of an impact on US subscriber growth, with reactions having a more muted impact in other regions. However, viewing per membership increased both globally and in the US.

The group spent $3.9bn on new content in the quarter, or $13.9bn for the full year - new fantasy series The Witcher has been a particular success, with 76m member households tuning in. The higher spending contributed to a free cash outflow of $1.7bn. On an annual basis, there was a $3.3bn outflow, but Netflix believes this will be the peak year for cash burn.

Looking ahead, the group expects revenue next quarter to reach $5.7bn, which would represent growth of 26.8%.That includes the slightly higher levels of churn being seen in the US.

Find out more about Netflix shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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