Netflix (NFLX) posted another strong quarter in terms of subscribers as the firm beat its guidance. Despite the beat on subscribers, both revenue and segment contribution came in only slightly above our projections. However, the firm continues to burn cash at a faster pace with a free cash flow loss of over $1.5 billion in the first three quarters of 2017 versus a loss of over $1.0 billion over the same period last year. Despite the beat on subscribers, our long-term thesis for the stock remains in place. Thus, we are retaining our narrow moat rating but raising our fair value estimate to $80 from $73 to account for the recently announced price increase.
Netflix reported better-than-expected subscriber growth in both the international (5.30 million net adds versus guidance of 3.65 million) and U.S. segments (0.85 million net adds, versus guidance of 0.75 million). Management once again attributed the net add outperformance to excitement around original content and the continued adoption of streaming video. Netflix continues to expand its streaming base, ending the quarter with more than 104.02 million global paid subscribers, up from 83.28 million a year ago.
The firm recently announced that it would increase the monthly price of the 2-stream HD and 4-stream 4K subscriptions to $10.99 (up from $9.99) and $13.99 (up from $11.99) respectively. The prices will roll out over the next few months for current subscribers which is a change from the previous price increases that grandfathered in current subscribers at old prices for an extended period. Given the firm’s continued cash burn and need to invest further in content, the price increase was not surprising but the timing was, given that this is the third hike in the last three years. We believe that many subscribers will continue to pay, but churn will spike and the price increase will make competing services look more attractive to potential subscribers.
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