Analyst: Netflix’s High Valuation Is ‘Somewhat Unwarranted’

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Netflix (NASDAQ:NFLX) expects to increase pricing, with existing members grandfathered in over a one- to two-year period. We believe Netflix management has done a masterful job of driving subscriber growth and managing content spending in recent years, resulting in sustained subscriber gains and improving profitability. Price increases over time should allow Netflix to add content and keep its subscriber base satisfied. However, we believe that even modest price increases have the potential to slow subscriber growth and to attract competition.

Improving contribution profit for domestic and international streaming. Contribution margin for the domestic streaming business has increased to 25 percent from 14 percent over nine quarters and for the international streaming business to (13) percent from (240) percent.

Netflix has delivered leverage from lower marketing spending and impressive control over content spending, with progress internationally in terms of subscriber additions and profitability. Netflix added 1.75 million net international streaming subscribers in the first quarter, above our estimate and guidance of 1.6 million. The company guided to 0.94 million net adds in Q2, above 0.61 million last year despite the negative impact of seasonality, with further expansion expected later this year.

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