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Sector: Media
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Fundamental View
AS OF 29 Jul 2024Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group’s leading position will be bolstered in 2024/25 as legacy media companies rein in spending and international ambitions.
From a financial perspective, we expect Netflix will deliver ~40% EBITDA growth in 2024 driven by a mix of subscriber growth, price hikes and margin expansion.
Netflix’s financial policy is relatively conservative. While the company no longer targets $10-15 billion of gross debt, we view Netflix’s new financial policy as an evolution rather than a revolution and expect credit metrics to remain best in class.
Business Description
AS OF 29 Jul 2024- NFLX is the world's leading subscription streaming entertainment service with ~278 mn paid streaming subs in 190+ countries around the world. NFLX's programming includes original & acquired TV series, documentaries and feature films.
- NFLX began expanding internationally with the launch of services in Canada (Sep 2010), followed by LatAm (Sep 2011), and the UK and Ireland (Jan 2012). NFLX launched services in 17 more markets at a measured pace through the end of 2015 before launching in the rest of the world in Jan 2016 (ex-China, N Korea, Syria, Crimea).
- At the end of 2Q24, Netflix's regional subscriber breakdown was as follows: (1) EMEA - 94.0 mn; (2) UCAN - 84.1 mn; (3) APAC - 50.3 mn and (4) LATAM - 49.3 mn.
- Ted Sarandos and Greg Peters are Co-CEOs, with Mr. Sarandos appointed to the position in July 2020 and Mr. Peters in January 2023. Co-founder Reed Hastings was appointed as executive chairman of the Board in January 2023.
Risk & Catalysts
AS OF 29 Jul 2024Market Saturation: Netflix is highly penetrated in the US market, so future growth will become increasingly dependent on price increases, uptake of the ad tier and success on the password sharing crackdown. The recent WWE and NFL deals also opens the door to higher-priced sports programming.
Increased Competition: Several large competitors including Amazon and Apple are increasingly leaning into DTC video offerings on a global basis. Heightened competition may result in rising churn & declining gross additions for NFLX.
M&A Risk: Netflix is in the early stages of an expansion into video games and has already acquired several studios. Additionally, several legacy media companies are weakly positioned and are actively considering asset sales. We believe Netflix has no interest in linear TV assets, but could be open to a studio purchase under the right circumstances.
Key Metric
AS OF 29 Jul 2024| $ mn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
|---|---|---|---|---|---|
| Revenue | 24,996 | 29,698 | 31,616 | 33,723 | 36,304 |
| Revenue YoY % | 24.0% | 18.8% | 6.5% | 6.7% | 13.0% |
| EBITDA | 5,116 | 6,806 | 6,695 | 7,650 | 9,301 |
| EBITDA Growth | 64% | 33% | (2%) | 14% | 44% |
| Cash Content Expense | 12,537 | 17,469 | 16,660 | 13,140 | 15,024 |
| CFO - CapEx | 1,929 | (132) | 1,619 | 6,926 | 6,819 |
| Dividends/CFO-Capex | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
| LTM CFO-CapEx to Debt | 11.8% | (0.9%) | 11.3% | 47.6% | 48.8% |
CreditSight View Comment
AS OF 18 Oct 2024We believe Netflix’s premium valuation is justified given the group’s leading scale, operating momentum (forecast ~30 million net adds and 40+% EBITDA growth in FY24) and credit metrics, which stand in stark contrast to the pressures facing legacy media peers. Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group is on track to extend its leading position as legacy media companies rein in spending and international ambitions and revert to licensing library content to competitors. The company’s gross leverage is already best in class at ~1.5x, and we expect Netflix can generate ~$7 billion of FCF in FY24 with a FCF to debt ratio in the ~45% area. Netflix is also positioned to maintain its double-digit top line and profit growth in 2025.
Recommendation Reviewed: October 18, 2024
Recommendation Changed: October 20, 2022
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