Netflix Posts Weak Subscriber Growth

Netflix NFLX posted another weak second quarter as subscriber growth came well below guidance and our expectations. Despite the subscriber miss, revenue came in line with our projection. The free cash flow loss for the quarter hit $594 million, up from a loss of $559 million a year ago. Management maintained its 2019 free cash flow loss target of $3.5 billion and continues to insist that the cash burn will “inflect” in 2020. We are retaining our narrow moat rating and our fair value estimate of $135.

Revenue of $4.9 billion came in line with our estimate and guidance. Netflix posted much weaker-than-expected subscriber growth in the international segment (2.8 million net adds versus guidance of 4.7 million) and in the U.S. (a loss of 0.1 million subscribers versus guidance of 0.3 million net adds). The losses in the U.S. reinforces our belief that adding the marginal subscriber will become increasingly hard in the U.S. for Netflix due to market saturation and to competition, particularly after Disney+ launches in November at $6.99 per month. Despite the miss, the streaming subscriber base for Netflix continues to expand, ending the quarter with more than 152 million global paid subscribers, up from 124 million a year ago.

Domestic streaming revenue of $2.3 billion was slightly ahead of our estimate and monthly revenue per paid U.S. member came in at $12.74, up 12% year over year. The growth in monthly revenue is due largely to the recent price increases which have been phased in completely in the U.S. The combination of the net sub losses and large increase does imply some possible price sensitivity for more marginal subscribers with a less price sensitive core user base. However, we believe increased competition and lower priced plans may test the level of price sensitivity for these core users over the next few years.

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