Netflix (NFLX) has Strong Int'l Opportunity, Will Get Stronger in Recessionary Environment - MKM

MKM Partners is lifting estimates on Netflix, Inc. (Nasdaq: NFLX), but maintains a Buy rating and $145 price target, but does see a buying opportunity in the name.

Analyst Rob Sanderson noted the following points.

On International:

• If NFLX adds international subs with the same linearity through 2016 as last year, Q1 guidance would imply about 18.5mn net paid additions for the year. Prior to the Q4 report, the Street was forecasting 13.0mn for the year. We are now forecasting 16.3mn (from 12.2mn previously).
• While early, this supports our thesis that OTT will drive TV penetration around the world far deeper than traditional pay-TV systems could. Our view stems from a massive deployment cost disparity, which allows lower ARPU and greater price elasticity.

Netflix will get stronger in a recessionary environment:

• A recession would likely accelerate cord-cutting. While more limited, an $8-10 per month video service is more attractive than a $100 per month service when spending budgets are stressed.

On valuation:

• Valuation comparisons on near-term earnings are meaningless in our view. The company is expected to spend about $3.5Bn this year in its international business and should be profitable in only about 20% of its footprint. Assessing value on near-term earnings reflects a view that international investments will never become ROI positive.

Sanderson's estimate revisions are:

Q1 paid sub adds: domestic from 2.31 down to 2 million and int'l from 3.1 million up to 4.35 million.
FY16 paid sub adds: domestice from 5.1 million down to 4.7 million and int'l fom 12.15 million up to 16.30 million
FY17 paid sub adds: domestic from 4.7 million down to 4.1 million and int'l from 13.8 million up to 15.3 million.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

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