Sector: Media
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Fundamental View
AS OF 11 Mar 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 2023/24 as legacy media companies rein in spending and international ambitions.
From a financial perspective, we expect Netflix will deliver double-digit EBITDA growth in 2023/24 driven by a re-acceleration in subscriber growth.
Netflix’s financial policy is relatively conservative. $5+ bn of FCF and target gross debt of $10-15 billion equates to strong IG metrics.
Business Description
AS OF 11 Mar 2024- NFLX is the world's leading subscription streaming entertainment service with ~260 mn paid streaming subs in 190+ countries around the world. NFLX's programming includes original & acquired TV series, documentaries and feature films.
- NFLX began expanding internationally with the launch of services in Canada (Sep 2010), followed by LatAm (Sep 2011), and the UK and Ireland (Jan 2012). NFLX launched services in 17 more markets at a measured pace through the end of 2015 before launching in the rest of the world in Jan 2016 (ex-China, N Korea, Syria, Crimea).
- At the end of 4Q23, Netflix's regional subscriber breakdown was as follows: (1) EMEA - 88.8 mn; (2) UCAN - 80.1 mn; (3) LATAM - 46.0 mn and (4) APAC - 45.3 mn.
- Ted Sarandos and Greg Peters are Co-CEOs, with Mr. Sarandos appointed to the position in July 2020 and Mr. Peters in January 2023. Co-founder Reed Hastings was appointed as executive chairman of the Board in January 2023.
Risk & Catalysts
AS OF 11 Mar 2024Market Saturation: Netflix is highly penetrated in the US market, so future growth will become increasingly dependent on price increases, uptake of the ad tier and success on the password sharing crackdown. The recent WWE deal also opens the door to higher-priced sports programming.
Increased Competition: Several large competitors including Amazon and Apple are increasingly leaning into DTC video offerings on a global basis. Heightened competition may result in rising churn & declining gross additions for NFLX.
M&A Risk: Netflix is in the early stages of an expansion into video games and has already acquired several studios.
Key Metrics
AS OF 11 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Revenue | 20,156 | 24,996 | 29,698 | 31,616 | 33,723 |
Revenue YoY % | 27.6% | 24.0% | 18.8% | 6.5% | 6.7% |
EBITDA | 3,113 | 5,116 | 6,806 | 6,695 | 7,650 |
EBITDA Growth | 55% | 64% | 33% | (2%) | 14% |
Cash Content Expense | 14,611 | 12,537 | 17,469 | 16,660 | 13,140 |
CFO - CapEx | (3,140) | 1,929 | (132) | 1,619 | 6,926 |
Dividends/CFO-Capex | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
LTM CFO-CapEx to Debt | (21.3%) | 11.8% | (0.9%) | 11.3% | 47.6% |
CreditSights View
AS OF 19 Apr 2024Netflix’s USD bonds trade like BBB+ paper, but we believe the premium valuation is justified given the group’s leading scale, operating momentum (forecast ~20+ million net adds and ~30+% 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 ~50% area.
Recommendation Reviewed: April 19, 2024
Recommendation Changed: October 20, 2022
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