Netflix growth expected despite mixed Q2

NFLX : NASDAQ : US$281.53 | US$15,183.2M | Buy , Target US$300.00

• Guidance marks transition; maintain BUY, $300 target

Investment recommendation
Netflix reported mixed Q2 results, with accelerating top line growth and EBITDA margin expansion offset by higher churn and lower gross margins. The company provided initial Q3 guidance, the first quarter following the new pricing plan, below consensus expectations. While the new pricing plan and aggressive international expansion will likely make for some uglier transition quarters, we continue to believe that the growth in connected devices, international expansion, and the content library will drive subscriber adds, revenue growth, and margin expansion, more than justifying the stock’s premium multiple.

Investment highlights
Q2 mixed. Revenue of $789M (+52% y/y vs. 46% in Q1) and GAAP EPS of $1.26 were mixed vs. consensus of $792M and $1.11. Ending subs of 25.6M were towards the high end of guidance of 24.9-25.85M and just below the consensus estimate of 25.7.

Initial guidance: Revenue guidance of $780-805M was below consensus of $847M; similarly, GAAP EPS guidance of $0.72-1.07 was below consensus of $1.10. Subscribers in Q3 are expected to reach 25.75-26.85M, divided among the three plan offerings (Figure 2). The company expects to see a return to subscriber growth in Q4.
Tweaking estimates: Our F2011 revenue/pro forma EPS estimates go from $3.27B/$5.40 to $3.26B/$5.64, while our F2012 estimates go from $4.57B/$8.07 to $4.82B/$7.95. Our price target remains $300 or 38x 2012E pro forma EPS, a modest premium to the broader e-commerce group at 33x that we feel is justified by the long-term growth and margin opportunity.

Today’s summary briefs from Canaccord Genuity

  • Baker Hughes (BHI : NYSE): Baker beats, but apparently not enough; raising target to $90, maintain HOLD rating
  • Magnum Hunter Resources (MHR : AMEX): 2011 analyst day take-aways; reiterating BUY and $10 price target
  • Netflix (NFLX : NASDAQ): Guidance marks transition; maintain BUY, $300 target
  • Texas Instruments (TXN : NYSE): Seasonality unlikely to materialize; maintain HOLD, $32 price target
  • Technology -- Enterprise Software: Weekend Musings v17
  • Motorola Mobility Holdings (MMI : NYSE): Q2/11 preview: solid international trends
    offset by Android share losses in US market; maintain HOLD rating and $25 price target
  • Green Mountain Coffee (GMCR : NASDAQ): Q3 outlook: Keurig staying hot in the
    summer, reiterate BUY and $97 target
  • Astec Industries (ASTE : NASDAQ): Raising estimates, but valuation keeps us on
    sidelines; maintain HOLD, $40 target
  • US Ecology (ECOL : NASDAQ): GE awards contract extension; maintain HOLD, $18
  • Derma Sciences (DSCI : NASDAQ): A sweet opportunity in wound care: initiate with
    BUY, $21 price target
  • NuVasive, Inc. (NUVA : NASDAQ): Q2/11 revenues up despite industry headwinds,
    EPS convoluted due to convert; maintain HOLD with $25 price target
  • Pharmasset, Inc. (VRUS : NASDAQ): Q2/11 update: big data points ahead; reiterate
    BUY, $160 target
  • OraSure Technologies (OSUR : NASDAQ): Identifies MDx entry point; reiterate BUY,
    $10 price target
  • Raptor Pharmaceutical (RPTP : NASDAQ): Complex but very positive trial stats, good safety present a compelling buying opportunity; reiterate BUY, $11 target

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is

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