Netflix's Studio Margins Will Be Eliminated, Thanks To More Original Self-Produced Content

Netflix, Inc. NFLX is "building a content moat and amortizing it over a global direct-to-consumer audience,” Brean Capital’s Alan Gould said in a note. He maintained a Buy rating on the company and raised the price target from $145 to $150.

The analyst expects Netflix to spend $15 billion annually on content in the next five years, spending $25 billion annually in 10 years.

A Margin Perspective

Gould mentioned the company had the largest global subscriber base, which allowed it to provide premiere content at the lowest cost per subscriber. Netflix also has minimal distribution costs and since it's planning to self-produce more content, the studio's margin will also be eliminated.

Netflix reported a significant beat to the Q4 subscriber expectations, with net additions of 7.05 million, representing the largest quarterly net additions in the company’s history.

The company guided to Q1 subscriber additions of 5.2 million, again ahead of expectations.

Margins To Expand

“Streaming contribution margins were better than expected due to the higher-than-expected revenue and timing of content deals,” the analyst stated, with streaming contribution profit of $470 beating the estimate.

The Q4 domestic contribution margin came in at 38.2 percent, and is expected to cross 41 percent in Q1, with Gould pointing out, “The first quarter will benefit from the timing of product releases and we assume lower marketing.”

Netflix guided for sequential domestic contribution margin ahead of the sequential increase in revenue.