We have updated our Netflix Q4 net subscriber additions to account for all original programming released up to December 30, 2017. Based on Google Trends historical search data of every Netflix Original relative to its most popular show, 13 Reasons Why, we now estimate that Netflix will add 8.1 million subscribers in Q4 2017 vs. management’s guidance of 6.3 million net subscriber additions. This will be the third straight quarter Netflix will beat its guidance, putting net subscriber additions for the end of 2017 at 23.6 million, up 24% from the end of Q4 2016.
The following recaps the foundation of our proprietary multiple linear regression forecast model:
Systematically categorizing and weighing their most popular programming. Heavier weightings are given to returning shows and recent quarters. We have excluded kids shows and comedy specials.
Adjusting for seasonality – Winter months typically see higher net subscription adds both in the U.S. and Internationally.
Local language – Netflix has noted some local language content is making a big impact in certain countries. Given the lack of history, the impact is assumed to be linear.
EXHIBIT 1: Netflix Original Content Search Interest vs. Net Additions
Source: Google Trends, Netflix and Perspectec
Our forecast model is robust and statistically significant, with an adjusted r-squared of 0.99 and a small but material enough 18 degrees of freedom. The model estimates 8.12 million net subscriber additions for Q4 2017, putting the Global total subscribers at 117.37 million. This estimate is higher than our mid-quarter expectation of 7.6 million, owing largely to the continued success of ‘Stranger Things’ Season 2.
We forecast the splits to be 1.61 million net domestic subscribers and 6.51 million International subscribers.
Stranger Things Season 2 has fueled the beat– The highly anticipated second season of Stranger Things has delivered on its hype, with its peak Google search interest reaching close to that of 13 Reasons Why (91% of ‘13 Reasons Why’s peak to be exact). While new seasons of British Originals such as ‘Black Mirror‘ and ‘The Crown‘ have performed as well as expected, Netflix’s ‘classic’ Originals, ‘House of Cards’ and ‘Orange is the New Black‘ is seeing the lowest search interest since the first seasons were released. Marvel’s ‘The Punisher‘ and ‘Bright‘ starring Will Smith – two of the quarter’s highly anticipated Originals – faired relatively poorly, not being able to drum up much viewer interest. Luckily for Netflix, Stranger Things we believe more than made up for these fails.
Based on our estimates, we estimate Q4/17 revenues to be $3.34 billion, with gross and operating margin is 35.2% and 8.2% respectively. Based on these we expect EPS to be $0.38 versus a guidance of $0.41.
Q1 2018 Content Calendar is Relatively Tame – With the absence of Marvel Originals, 2018 doesn’t seem to have any expected crowd-pullers slated, which is very atypical of Netflix. It has some interesting programming scheduled including, foreign language documentaries like Sovdagari, a reboot of the Emmy winning show Queer Eye and the futuristic Altered Carbon, but it is too early to judge the potential impact of these shows. Keeping in-line with its previous conservative guidance, we believe Netflix will guide towards 4.8 million net subscriber additions for Q1 2018.
Conclusion – Based on our forecast regression model, we estimate Q3’s net adds to be 8.12 million as opposed to management’s guidance of 6.3 million. This is mostly unchanged from our prior estimate as shown in Exhibit 2. We believe Netflix should be purchased prior to their Q4 report. Our rating is supported by the bullish bias identified by our Technical Strategist (technical analysis is expected to be released over the next week).
EXHIBIT 2: Q4 2017 and Q1 2018 Estimates
Source: Perspectec
Updated Target
Our valuation of $207 is based on 6x the average of its trailing 12-month CLTV minus CGC and its forward 12-month CLTV minus CGC. We divide this value by the weighted average diluted shares outstanding.
The math on this is 6x (( [$15.2 billion – $4.0 billion] + [$20.85 billion – $5.2 billion] )/2) / 448 million shares outstanding. This equals about $207.
However, we believe the market will eventually price in a 30% chance that AAPL or another acquirer comes in after funds are repatriated from overseas. Adding a 30% probability to a 30% premium on a takeout increases our target from $207 to $225. We believe this is could approximate where the stock will trade at in the coming weeks.
The exhibit below shows how the stock has traded versus our current valuation methodology.
EXHIBIT 3: Target Price Methodology versus Historical NFLX Price
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.
