Netflix: Revenue Upside to Be Re-Invested into Original Content
Here are our five key takeaways following Netflix’s December results:
- Netflix reported Dec-18 revenue essentially in-line and earnings 25% above street consensus. The company guided Mar-19 revenue 2% below the street and earnings 33% below the street. The disconnect between Mar-19 revenue guidance and street consensus can likely be attributed to the street mis-modeling the rollout of Netflix’s recent price increase.
- Regarding the price increase, here’s the key quote from Netflix: “But you also see ASP domestically improve over the course of the year. And that’s what we think will drive an acceleration in revenue growth over the course of 2019.”
- The incremental revenue generated by the price increase will be reinvested in original content. Netflix’s original content spend is increasing: the company plans to create more shows and the cost per episode is rising.
- One unexpected comment from the earnings release was related to the impact of Fortnite as a competitor. While Netflix is the gold standard of original streaming video content, the company will face an increasing headwind from live streaming content. Netflix’s new CFO, Spence Neumann, was formerly CFO for Activision Blizzard and has familiarity with gaming, which dominates live streaming today. Read more about our thoughts on the rise of live streaming.
- Overall, Netflix is continuing to execute well as highlighted by the success of their original content and international subscriber growth. While the company has a meaningful growth opportunity related to continued international expansion, we think the probability of significant upside to revenue and earnings will diminish.
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