Netflix 'inflexion' may be on the cards, suggests RBC Capital

RBC Capital Markets jumped on the back of Netflix's "very strong" numbers overnight to shout about a potential "iNFLeXion!" in the business as the online TV company grows subscribers and sees operating margins climb.

Netflix’s added 7.4m new subscribers in the first quarter of 2018, beating its guidance for 6.35m, with US-based subs of 1.96m 3% ahead of Wall Street's expectations and international adds of 5.46m 9% better than the Street. Guidance for the second quarter was also well above analysts' expectations, with Netflix eyeing 1.2m of domestic subs and 5m overseas, which was 23% and 19% respectively more than Wall Street.

RBC said they believe secular demand for internet TV is "ramping rapidly globally, and Netflix has positioned itself extremely well to benefit from this".

Pricing power helps, the analysts said, adding that the breadth of the company's content offering is "paying dramatic dividends" in terms of subscriber adds and retention, with each $1 of monthly subscription paid to Netflix gives a user access to $1.1bn of content spend, almost two times the ratio of most media companies.

Increased marketing spend and distribution partnerships, such as T-Mobile, Sky, Comcast, are also helping. "And the scale advantages of the business model are proving out – US streaming gross margin now [at a] record-high 51%."

RBC, which reiterated its 'outperform' rating and upped its target price to $360 from $350, increased its 2019 revenue forecasts 2% to $19.8bn, with operating income up 7% to $2.71bn.

"Global streaming revenue growth should accelerate from 36% in ’17 to 40% in ’18E," analysts said.

They also saw potential for 'inflexion', noting that operating margins are ramping and that its assumptions "may be conservative" as global subscriber adds in the first half "appear on track" to be more than 30% higher than last year's and content and marketing costs are expected to be back-end loaded in 2018.