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Netflix’s Decline Emphasizes Limited Value of Users Overseas

Joe Easton, Kit Rees and Kamaron Leach
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Netflix’s Decline Emphasizes Limited Value of Users Overseas

(Bloomberg) -- Netflix Inc.’s latest earnings report spurred mixed feelings across Wall Street as growth overseas was offset by a slowdown in the U.S. amid rising competition from Walt Disney Co., Apple Inc. and more forthcoming launches.

Needham Co. believes the spike in streaming rivals will increase Netflix’s churn and customer acquisition costs, most likely lowering the lifetime value per subscriber as growth overseas isn’t equivalent to that domestically. Netflix would need to “add four $3-per-month subscriptions in India to offset each U.S. subscriber lost,” Laura Martin, TMT analyst at Needham, wrote in a note.

Shares in Netflix fell as much as 3.7% on Wednesday morning, the most in 10 weeks, before trimming some of that decline. The stock has fluctuated since the streaming service reported Tuesday post-market.

Analysts remained generally positive about the results and, despite first-quarter guidance missing estimates, believe the forecast appeared to be cautious. Netflix added 8.3 million subscribers internationally in the fourth quarter to surpass 100 million paid memberships outside of the U.S. for the first time.

“Netflix is taking a conservative tone to start the year, with the assumption of slight headwinds,” wrote Raymond James’s Justin Patterson. “This reflects content timing, a competitive launch in Europe, and working through 2019’s U.S. churn,” he added.

Stifel analyst Scott W. Devitt also said Disney+ appeared to have a less meaningful impact in available international markets than in the U.S. Still, the analyst cautioned about potential effects of the broader rollout of Disney+ in the EMEA region toward the end of the first quarter.

Here’s what Wall Street is saying:

Morgan Stanley, Ben Swinburne

Overweight, price target $400

Update reinforces bullish long-term view and, going forward, analyst expects 90% of global paid net additions to come from outside the U.S., amid continued elevated domestic churn.

Notes that local originals were the most popular titles in 2019 in countries including India, Japan, Turkey, Sweden and the U.K.

Guidance for nearly $1 billion in free cash flow improvement begins the path toward positive free cash flow and reinforces confidence in the earnings outlook.

Piper Sandler, Michael Olson

Overweight, price target $400

Netflix reported a “strong” fourth quarter thanks to international subscriber additions, though its first-quarter outlook was below consensus and “likely conservative.”

Domestic streaming net subscriber additions were below the Street, likely due to the combination of elevated churn from pricing changes applied earlier in the year and new competition from Disney and Apple.

Loup Ventures, Gene Munster

“A mixed bag,” with domestic competition demonstrated by U.S. churn but with outperformance at the international business, leaving Netflix’s underlying growth opportunity intact.

Also notes that from next year, consumers will have to make more thoughtful streaming decisions as promotional pricing from Apple TV+ and Disney+ comes to an end.

“Including video offerings with other paid products and services creates a temporary perception of value in the minds of consumers and an opportunity for video providers to hook viewers, but, eventually, that perception changes.”

BMO Capital Markets, Daniel Salmon

Outperform, price target $440

While U.S. churn remained slightly elevated after a price increase and competitive launches, “solid” growth in U.S. subscribers pushes back materially on the most bearish views.

Combined with better-than-expected results in non-U.S. subscribers, BMO says that story remains “firmly intact” for growth investors, whereas free cash flow guidance for 2020 coming in better-than-expected should support interest from GARP (growth at a reasonable price) investors as Netflix makes the free cash flow turn.

Bernstein, Todd Juenger

Outperform, raises price target to $423 from $415

International net paid adds accelerated in every region to a new fourth-quarter all-time high, beat the guide, and beat Bernstein’s estimate and consensus. Since international is where all the total addressable market and future growth lies, says Juenger, “perhaps we should just end this report right here.”

“Imagine how differently this EPS report might have been received if Netflix had found an additional 200,000 U.S. net adds.” Netflix still grew in the U.S., Juenger wrote.

Netflix’s U.S. subscribers “responded to the Disney+ launch by watching more Netflix.”

“With very little new original Disney+ content over the next several quarters, we think consumers will be reinforced in their appreciation of Netflix’s unique value proposition: ‘always something new to watch.’”

Citigroup, Jason Bazinet

Neutral, price target $325

Citigroup expects the stock to trade flattish as the better EPS outlook is offset by the lower-than-expected net add guidance.

“All told, while the firm delivered a solid set of 4Q19 results and issued 1Q20 EPS guidance above expectations, we suspect that management’s 1Q20 net add guidance is less robust than the market expected.”

Needham, Laura Martin

Underperform rating

“U.S. subscribers historically have been 3x more profitable than international subs. This gap is widening, and India highlights this problem.”

Going forward, Netflix will aggregate low return on investment (ROI) international subs with U.S. subscribers, which masks Netflix’s true ROI trends. Management must add four $3-per-month subscriptions in India to offset each U.S. subscriber lost.

Needham expects rising U.S. competition to increase Netflix’s churn and customer acquisition costs, which should lower the company’s lifetime value per subscriber versus historical levels, and put downward pressure on valuation multiples.

RBC Capital Markets, Mark Mahaney

Outperform, price target $420

“We are incrementally positive. In a year when Netflix had two hands tied behind its back (material price increases and pullback in marketing spend), it managed to add almost as many global paid subs in FY19 as in FY18.”

“That said, the ‘churn coast’ is not yet clear in the U.S., with domestic adds slowing, as Netflix felt roughly equal impacts from last year’s price increase and new competitive launches.”

Evercore ISI, Vijay Jayant

In-line, price target $300

“With the service likely having reached ‘peak net adds’ we remain cautious on longer-term ARPU and margin trends and view the risk/reward tradeoff as fair at best at current valuations.”

“While bulls will point to a better content slate in the 2Q as a means of making up any 1Q shortfall, we are less convinced given a flurry of competitive launches as a headwinds to consider and believe it likely that 2018 will ultimately represent peak net additions for the company.”

Raymond James, Justin Patterson

Strong buy, price target $415

“Netflix is taking a conservative tone to start the year, with the assumption of slight headwinds on UCAN and international markets.”

“This reflects content timing, a competitive launch in Europe, and working through 2019’s U.S. churn.”

(Adds share move in third paragraph, Needham and Raymond James comments to second and fifth, and more commentary in analyst section after BMO.)

--With assistance from Lisa Pham and William Canny.

To contact the reporters on this story: Joe Easton in London at jeaston7@bloomberg.net;Kit Rees in London at krees1@bloomberg.net;Kamaron Leach in New York at kleach6@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Celeste Perri, Jeremy R. Cooke

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