By Vivek Couto, Aravind Venugopal

Netflix stock hit fresh all-time highs on Jan. 29, stretching toward a US$125 bil. market cap. Last week’s Q4 results were generally in line with financial expectations but blew away estimates for subscriber growth. Netflix’s 8.3 mil. net adds in Q4 were ~2 mil. more than expected, driven by gains at home in the US and abroad. The company is trading at a rich 6.6x forward revenue multiple and a >100x P/E multiple.

Estimates from Media Partners Asia (MPA) indicate that Netflix added 2.1 mil. net new paying customers in Asia Pacific over CY2017, including ~1.0 mil. outside Australia and Japan. MPA analysis suggests Netflix’s pay subs base in APAC reached ~5.5 mil. at end-2017, or close to 2.4 mil. excluding Australia and New Zealand, driven by steady gains in Japan, India and parts of Southeast Asia.

It’s still early days, with the onus very much on the scalability and success of Netflix’s original Asian content and international originals, supported by broader plans and partnerships for programming development. Increasingly, the company is focusing its series and movies across Korea, India and Greater China as well as Japan, Indonesia and Thailand with new hires, partnerships and investments.

MPA estimates a base case 9 mil. paying customer target for Netflix in Asia Pacific by end-2020, or 5.5 mil. excluding Australia and New Zealand. This implies significant gains in India alongside steady incremental growth in Japan and Southeast Asia. The numbers may be conservative and Netflix could beat this target by as much as 15-20%.

We remain cautious on Netflix’s progress in Korea and Indonesia due to the lack of distribution and partnerships with the largest telco broadband networks in these territories, as well as the scale of incumbent local competition in Korea.

Vaulting valuation. Globally, the company also continues to exceed expectations on recurring subscription revenues, together with fast growing Ebitda and margins, in addition to subscriber growth. However, the company’s performance and valuation are arguably entirely separate. Is Netflix as a company really >100% better than it was last year (as its stock price run implies)?

Netflix continues to deliver on two key criteria for investors: growth and scale. Such momentum may even help the stock touch US$300 in the short term from US$270 (market close, Jan 31). In the long term however, share price risks linger, including:

• Increased competition for streaming entertainment globally, from Amazon and Disney (with or without Fox) to Apple, post 2019 and globally from 2020 onwards
• While exceeding subscriber targets is a good sign, it’s a lumpy metric. The company has often failed to deliver on subscriber targets, most recently missing by ~0.5 mil. in Q1 2017
• Free cash flow in Q4 amounted to -US$524 mil., bringing FY 2017 free cash flow to -US$2.0 bil. We estimate ~US$3.5 billion free cash flow in 2018, with $3 bil. spent on incremental original production and US$0.5 bil. in additional marketing

For full analysis with charts and tables, please contact Lavina Bhojwani, VP, Client Services, Media Partners Asia