Netflix Report
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EQUITY RESEARCH REPORT | 07/01/19 NETFLIX, INC. Recommendation: HOLD (Ticker: NFLX) Rating: 5 POTENTIAL FOR RETURN RISK RATING LIMITED SIGNIFICANT LOW HIGH 1 7 Industry: Entertainment Sector: Over-the-Top Media Stock Price: $367.32 (7/1/19) Jarvis Rank: 151 (Data as of 07/01/19 unless specified) Enterprise Value: $168.4B Market Cap: $160.6B Sales: $15.8B Fwd (TTM) 8.67x Fwd (TTM) 7.90x Fwd EV/EBITDA: 13.3x EV/Sales: (11.10x) Price/Sales: (7.65x) 46.2% 4.7% Fwd (TTM) ROE: Fwd (TTM) ROA: RSI: 57.8 (27.4%) (5.4%) Insider Transactions: In the last 12months, insiders have sold a net of 1,076.3k shares WHY WE RATE NETFLIX A HOLD 1. Revenue increased from $11.7bn in FY 2017 to $15.8bn in FY 2018 (YoY growth: 35.0%) 2. The Company’s main source of revenue is its paid memberships, and there has been an increase in net additions in paid members from 21mn LB INSIGHT in FY 2017 to 28mn in FY 2018 3. Netflix is currently the biggest player in the Over-the-Top market An investment in Netflix is a play globally with a presence in 190 countries having nearly 90,000 minutes on the evolving entertainment industry, which is moving away of original content1 from linear media. Netflix leads in 4. The Company’s net income increased by ~$652.3mn from $568.9mn in the online streaming services;, FY 2017 to $1,211.2mn in FY 2018 however, the industry is witnessing increased competition. a. EPS increased to $2.68 in FY 2018 from $1.25 in FY 2017 Quality of the original content 5. Operates in a rapidly growing market that is projected to reach $332.5bn will act as a catalyst for future by 2025 growth. 6. However, competition in the OTT (Over-the-Top) media services industry is heating up as new competitors with deep pockets, like Apple TV+ and Disney+ are entering the market 7. Many popular Disney titles are set to leave the platform and will be available exclusively on Disney+ 8. Free cash flows have been declining for the last five years from -$127mn in FY 2014 to over -$3bn in FY 2018 as the company shifts its focus to more original content than licensed content 9. Licensing costs have shot up for popular shows like Friends and The Office and their contracts are going to elapse at the end of 2019 and 2020, respectively 1 https://qz.com/1505030/keeping-up-with-netflix-originals-is-basically-a-part-time-job-now/ “Seeking Stocks that can 1 Double in 2-3 Years” 0.94 EQUITY RESEARCH REPORT | 07/01/19 SUMMARY OF THE BUSINESS AND THE INDUSTRY Business2 The Company operates as an online media streaming company that primarily focuses on delivering movies and TV shows to viewers over the internet, while continuing its DVD-by-mail service in the US. The Company operates on a subscription-based model wherein the subscribers are given unlimited access to content available on the platform, inclusive of the original content from Netflix. The company has also partnered with manufacturers of various consumer electronic products, which include video game consoles, Blu-ray disc players, smart TVs, and smartphones to enable the streaming of its content on their devices. The company has expanded rapidly, and as a result, its content is available for online viewing in more than 190 countries across the globe currently. The company derives its revenues from the following segments: • Domestic Streaming o Operates the largest SVOD (subscription video-on-demand) service in the US, with over 60mn subscribers o The Subscriber growth rate is slowing down due to saturation in the domestic market o In Q1 2019 the company added a total of 9.6mn subscribers, of which only 1.7mn were from the US compared to 2.2mn in Q1 2018 • International Streaming3 o The international markets are the growth catalyst for Netflix currently, as is evident from the rapidly growing subscriber count. The company added a total of 7.8mn subscribers during the latest quarter o The company followed a phased globalization strategy, and in 2010 it entered the similar Canadian market, which was also geographically close, thereafter expanding to a vast number of geographies o Currently, the focus is on expansion in the Asian market, particularly India where the company aims to add close to 100mn subscribers in the coming few years • Domestic DVD4 o The company continues to operate its DVD-by- mail business, which has seen a downward trend since 2007 when the company launched its online video service o The subscriber count stands at nearly 2.6mn as of Q1 2019, and the segment is still profitable LB•INSIGHT Netflix has huge potential for growth, the majority of it coming from international markets. The company can benefit immensely from the growing internet penetration in markets like India, where it plans to grow the subscriber base over 100mn in the next few years. 2 https://www.vox.com/2019/4/16/18410996/netflix-growth-international-earnings 3 https://www.cnbc.com/2018/11/08/netflix-to-expand-audience-across-asia-focus-on-india-not-china.html 4 https://www.fool.com/investing/2019/02/02/netflix-still-has-2700-stubborn-dvd-subscribers.aspx “Seeking Stocks that can 2 Double in 2-3 Years” 0.94 EQUITY RESEARCH REPORT | 07/01/19 Outlook/Estimates5 Q1 2019A Q1 2019E Q2 2019E Revenue $4,521.0mn $4,494.0mn $4,928.0mn Operating Income $459.0mn $400.0mn $616.0mn Income Per Share (Diluted) $0.76 $0.56 $0.55 Industry/Competition The company operates in a growing market, which was valued at $97.4bn as of 2017 and is projected to reach $332.5bn by 2025 at a CAGR of 16.7%.6 Netflix competes with several other players operating in the global OTT (over-the-top) media services industry • Amazon Video7,8 o Amazon Prime Video is the second largest service provider in the OTT media services industry, with a subscriber base that is estimated to be in the range of 26-30mn o The company has made the streaming service available in over 190 nations and territories o The company has never disclosed the exact number of users subscribed to Prime Video, but it reported in 2018 that there are more than 100mn people who use its umbrella subscription Prime, that bundles a range of services including fast delivery of goods o According to Forbes, Amazon Prime Video subscribers are expected to reach 56mn in the US alone and 122mn in total by 2022 o The Prime service has been the primary growth catalyst for Amazon to gain new subscribers in Japan, Germany, and the UK o The primary focus for Amazon has not been volume, rather for them it is more about quality over quantity • Hulu o Hulu is an American SVOD service majority owned by Walt Disney Direct-to-Consumer & International o The platform has greatly expanded its content library, which helped it break the 25mn subscriber mark in January 2019, a ~50.0% YoY increase o Disney expects Hulu to reach as many as 60mn subscribers by 2024 o The current focus of the company is on securing more exclusive licensing rights and developing more original programming content to boost the viewership and drive growth in the subscriber base o Disney has plans to position Hulu as a platform for adult-oriented series and classic television shows, while the original Disney series will be streamed exclusively on Disney’s streaming service, Disney+, which is set to launch towards the end of 2019 5 https://s2.q4cdn.com/967921702/files/doc_financials/2019/Q4/Investor-Relations-(4Q19).pdf 6 https://www.alliedmarketresearch.com/over-the-top-services-market 7 https://venturebeat.com/2019/03/30/global-video-streaming-market-is-largely-controlled-by-the-usual-suspects/ 8https://www.forbes.com/sites/louiscolumbus/2018/03/04/10-charts-that-will-change-your-perspective-of-amazon-primes- growth/#17600ab3feea “Seeking Stocks that can 3 Double in 2-3 Years” 0.94 EQUITY RESEARCH REPORT | 07/01/19 • Apple TV+9 o Apple announced its upcoming over-the-top ad-free SVOD web television service during their Apple Special Event on March 25th o The content will be available on Apple's TV app, which is scheduled to become accessible to numerous consumer electronics devices o The application will be available to iPhone, iPad, and Apple TV customers in over 100 countries o The platform will be aggregating content from more than 150 streaming apps including Amazon Prime and Hulu o Apple had allocated a budget of at least $1bn in 2018 and another $2bn in 2019 for buying and production of original video content o Apple’s video team is led by two ex-Sony Pictures execs, Jamie Erlicht and Zack Van Amburg, who both have shown such as Breaking Bad and Better Call Saul under their belt and worked at Sony for 20 and 15 years, respectively • HBO Now10 o HBO Now is an American SVOD service operated by American premium cable and satellite television network HBO o The service allows subscribers on-demand access to HBO's library of original programs, films and other content on personal computers, smartphones, tablet devices, and digital media players o It is only available to customers in the US, and certain US territories. Due to regional rights restrictions, HBO cannot offer the service outside of the country o It has 5mn paying subscribers, and its library offers 75+ original TV series o WarnerMedia is set to launch a new streaming service in 2020, which focuses primarily on HBO library content.