MKM Partners is updating estimates and raising price target.. For Q3 we are relatively in line with guidance. While MKM Partners sees potential for conservatism in the subscriber guide, it is still early in the quarter, subscriber trends are not always linear and there have been several instances of demand pull-forward in the past. MKM Partners continues to believe the global opportunity for Netflix is very large and still open. While MKM Partners thinks 2021 is a relevant benchmark (fifth year after global launch), MKM Partners believes the growth story will still be early by that time. MKM Partners earnings power framework for 2021 is relatively unchanged (over $12 per share), but MKM Partners raises multiple (from 22.5x to 25x) and have lowered the discount rate (from 25% to 20%). This brings to $230 price target by mid-2018.
Net subscriber additions in the U.S. market continue to surprise on the upside. While most investors expected another down year, domestic net paid additions are tracking 11% ahead of last year inclusive of Q3 guidance. Many investors believed the domestic market was approaching full penetration; MKM Partners continues to think the top end of the S-curve is much larger and that full penetration in the U.S. is more likely above 90mn subs than below
International is now the majority of total members, for the first time ever. The international userbase grew by 44% in Q2 and is up more than 14x in five years. There are nearly 600mn pay-TV subs outside of the U.S. and China (i.e., markets included in NFLX international segment). MKM Partners thinks internet subscriptions will eventually be higher because OTT models are better and much cheaper. When asked their view of the global opportunity, management has referenced other global platforms like Facebook and YouTube, where about 80% of users are international. This mix on today’s U.S. base would imply over 250mn international members.
Original programming continues to be a meaningful source of subscriber acquisition around the world. NFLX is already the largest content budget of any programmer ($6bn this year) and is gaining global scale the fastest. MKM Partners thinks a strong virtuous cycle is emerging for NFLX as content spending is driving sub growth, which continues to allow increases in content spending.
While MKM Partners look to $12 of EPS power in 2021 as valuation benchmark, MKM Partners thinks there is a much larger opportunity over time. At 90mn U.S. and 300mn international subscribers, modest APRU increases and a $24bn content budget, MKM Partners earnings power framework suggests that more than $30 of EPS power is possible over time.