Buckingham Sidelined On 'Fully Valued' Netflix After Strong Q1 Print

Netflix, Inc. NFLX outpaced expectations for subscriber numbers in the first quarter, sending shares sharply higher.

Despite the strong Q1 print, Buckingham Research Group remains on the sidelines for the streaming platform.

The Analyst

Analyst Matthew Harrigan maintained a Neutral rating on Netflix and increased the price target from $277 to $301.

The Thesis

Despite Netflix's compelling business model, its shares are "fully valued," Harrigan said in a Tuesday note. (See the analyst's track record here.)

The company added 7.4 million global subscribers — ahead of Buckingham's estimates as well as the Street's —  with 1.9 million of the additions coming from the U.S. and 5.5 million from overseas.

ASP in the U.S. increased 12 percent, while forex-neutral overseas ASP rose 13 percent, thanks to significant price increases announced in October, the analyst said.

Sales rose 40.4 percent to $3.7 million, ahead of expectations, and operating profit increased 73.8 percent to $446.6 million, also ahead of expectations, Harrigan said. The bottom-line result, at 63 cents per share, was one cent better than the consensus estimate.

Free cash flow burn was merely $287 million, but Netflix is guiding for a $3-4 billion deficit in 2018 with several more years of negative cash flow, the analyst said.

Netflix continues to spend big on content, with $7.5 to $8 billion earmarked for 2018, Harrigan said. 

Buckingham sees ample traction in foreign, non-English production — a key to overseas growth.

Looking at the reasons for the fundamental outperformance, Buckingham said the company continues to spend big on content, with an estimated $7.5 billion to $8 billion spend earmarked for 2018.

The production of foreign, non-English content is "key" to Netflix's overseas growth, and this is being achieved with shows like "Dark" in Germany, "O Mecasnismo" in Brazil and "La Case de Papel" in Spain, Harrigan said. 

The Price Action

Netflix shares were rallying 7.23 percent to $330.03 at the time of publication Tuesday, on top of a 60-percent gain for the year-to-date period.

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Photo courtesy of Netflix.