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NFLX-TRACKER | july 2020

The growth rate in NFLX worldwide mobile app downloads accelerated to 59% YoY in 2Q20, reflecting the positive impact COVID had on near-term adoption trends. We expect NFLX will report Q2 subscriber additions of at least 10M, which is above management's guidance for 7.5M. However, we believe Q2 will represent the peak in subscriber growth, margins, and cash flow for the next 12-18 months. We are already starting to see a slowdown back to pre-COVID levels of growth as consumption trends normalize, and we come up against a difficult content release comparison (Stranger Things and Money Heist released in 3Q19).

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Month-to-date through 7/14, the growth rate in NFLX worldwide mobile app downloads has slowed to 8% YoY. This growth level is comparable to what we saw post-price-increase in 2019 and early 2020 prior to COVID. We see much slower rates of growth in developed (more mature) markets such as North America (-25.7% YoY MTD) and Europe (-14%). Asia continues to post the strongest absolute growth rates; however, the acquisition rate is clearly slowing and the comparisons get more difficult in 2H20. This slowdown is consistent with subscriber trend commentary we heard from CuriosityStream earlier this week (Click Link Below).

Click Here for Replay and Key Takeaways From Our Fireside Chat w/CuriosityStream

We would also remind investors that Netflix rolled out cheaper, mobile-only plans in many Asian countries in 2H19, which helped drive growth and paid conversion. We do not believe NFLX has similar growth levers at their disposal over the next 6-12 months.

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What to do with the stock from here?

Netflix's stock price tracks the rate-of-change and second derivative in subscriber trends very closely. We expect a significant, second-derivative slowdown in subscriber acquisition over the next 12-months. We expect this slowdown to begin in 3Q20 and last through at least 2Q21. In this scenario, we believe the short will start working again on both a relative and absolute basis over the next 12-months.

If NFLX stock rallies post better-than-expected Q2 results, we will look to get more aggressive on the short side given the slowdown we see in the data to start Q3.

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Please let us know if you would like to see The Netflix Tracker data file. 

CLICK HERE FOR MAY 2020 NFLX-TRACKER

CLICK HERE FOR FEBRUARY 2020 NFLX-TRACKER

CLICK HERE FOR JANUARY 2020 NFLX-TRACKER

CLICK HERE FOR DECEMBER 2019 NFLX-TRACKER

CLICK HERE FOR NOVEMBER 2019 NFLX-TRACKER

CLICK HERE FOR OCTOBER 2019 NFLX-TRACKER

Please call or e-mail with any questions.

Andrew Freedman, CFA
Managing Director
@HedgeyeComm

key takeaways

The following estimates are based on a 12/31 survey of 1,950 U.S. consumers balanced by age and household income according to the U.S. census. Estimates for Australia (n =800), New Zealand (n = 350) and Canada (n =350) are based on a 12/31 survey. 

CLICK HERE FOR LAST WEEK'S NETFLIX/DISNEY BLACK BOOK

(Includes updated NFLX Intl. sub estimates, TAM model and NFLX mobile MAU trends by region)

Netflix (NFLX)

(U.S. unless otherwise noted)

• Flat Paid U.S. Adoption; We estimate U.S. paid (excluding free trials and password sharing) household adoption of Netflix was flat QoQ at ~51% in Q4.
• Australia, New Zealand and Canada Adoption Same as U.S.; Netflix paid household adoption ranges from 49% - 54% in these countries.  
• Netflix Subs Did Cancel for Disney+; We estimate ~3.5% of Netflix paid subs (~2M) have canceled Netflix and subscribed to Disney+. Given Disney+ launched on 11/12 and Netflix runs on monthly billing cycles, we believe incremental churn from Disney+ wouldn't flow through to reported numbers until 1Q20. 
• Churn Elevated; ~8% of current Netflix paid subs as of 12/31 indicated they have canceled their subscription but still have access through the end of their billing period. While we don't have a time-series to compare this too, we continue to believe that churn remains elevated through Q4/Q1 due to price increases and competition.
• Price, Lossed Content and Religion Top Reasons for Cancelling; Price continues to be the main reason why Netflix subs cancel at 32%. Meanwhile, 22% of respondents canceled "because they no longer have a TV series or movie" they liked. We believe this factor will become more important as Netflix loses tier 1 licensed content like 'Friends' on 1/1/20 and 'The Office' on 1/1/21. 

Disney (DIS)

(U.S. unless otherwise noted)

• Strong Disney+ Adoption in the U.S.; We estimate 12/31 paid (excluding free trials and password sharing) U.S. household adoption of Disney+ of 23% (+/- 2%). Assuming 100M internet households in the U.S., we can convert this number to 20-25M paid subscribers.
• Strong Disney+ Adoption New Zealand, Australia and Canada; We estimate 12/31 paid (excluding free trials and password sharing) household adoption of Disney+ ranges from 12% - 16% (see chart below). We estimate 4-6M paid subscribers as of 12/31 from these countries and the Netherlands. 
  
• Long-term Plans Reduce Churn; ~40% of Disney+ subscribers are locked into a plan for more than 1-year; Incremental growth in adoption in December came from monthly subscriptions that represent ~38% of total paid subscribers.
• Modest Churn / Lower than Netflix; ~4% of paid Disney+ subscribers (~1M) as of 12/31 indicated they have canceled their subscription but still have access through the end of their billing period. This churn rate compares favorably to Netflix at ~8%. 
• Lack of Content Top Reason for Cancelling; Among those who have canceled, lack of content was the top reason at 61.5%. However, 60% of those who have canceled indicated they are 'likely' or 'extremely likely' to subscribe again.
• Disney+ is Sticky; The likelihood of cancellation among current paid Disney+ subscribers that are on monthly plans (whether through the bundle or stand-alone) is lower than Netflix. 
• Disney+ TAM Smaller than Netflix; The likelihood of subscribing among non-Disney+ subscribers is lower than Netflix, and likely reflects the narrower content appeal.

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Please call or e-mail with any questions.

Andrew Freedman, CFA
Managing Director
@HedgeyeComm