We have updated our net subscriber addition regression model based on Q3 results. Our forecast model now has an adjusted r-squared of 0.99 for tracking net subscriber additions using 18 degrees of freedom. We have applied this model to Q4 programming using data for the week ended November 25, 2017. Based primarily on the performance of it’s original content, we believe Netflix will add anywhere between 7.7 million to 8.2 million subscribers in Q4. This estimate is up from our estimate of 7.4 million net additions at the end of Q3 and would be a strong beat against management’s guidance of 6.4 million net adds. The findings strengthen our opinion that Netflix’s will again materially beat its conservative net subscriber guidance, just as it did in Q2 and Q3.
EXHIBIT 1: 2017 Net Subscriber Additions by Quarter – Guidance vs Actuals
Source: Perspectec
A reminder about our model – We have collected Google Trends search history of all Netflix Originals (excluding Kids programming and comedy specials) relative to Netflix’s most popular show, 13 Reasons Why, and adjust the data for seasonality and internet penetration.
Stranger Things brings Christmas early for Netflix– Season 2 of Stranger Things was a huge success, with a search interest comparable to (but slightly short of) 13 Reasons Why. To put this in perspective, the performance of 13 Reasons Why drove the 5.2 million net subscriber additions globally in Q2 2017 vs. a guidance of 3.2 million and 1.7 million in Q2 2016. In addition, the much anticipated new Marvel series The Punisher is drawing a reasonable level of interest, along with old favorites such as House of Cards.
What’s in Store– There are two Originals worth looking out for in the remainder of the quarter- Season 2 of the globally acclaimed The Crown and Bright, a futuristic movie starring Will Smith. Based on their performance, the two Originals could provide a large upswing towards the net additions.
What does a Net Subscriber Additions beat mean for the stock price? – Q4 net subscriber adds of 7.95M vs. guidance of 6.3M on the surface appears to be a material beat at first. However a 1.65M (26%) beat does not materially stand out versus the last two quarters results, which beat by about 2M (63%) and 0.9M (20%) respectively. This figure alone may not be enough to move the stock price higher.
Updated Forecasts
Source: Perspectec
Valuation
Source: Perspectec
On a trading basis, the stock has moved further off its YTD highs in comparison to other FAANG stocks. However at the moment we do not believe it has fallen far enough to warrant a buy.
Current Share Price versus YTD Highs
Source: Perspectec
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
