Analyst sees favorable setup ahead for Netflix on international subscriptions

In a research note this morning, William Blair analyst Ralph Schackart argued that he believes Netflix's setup for second half of 2018 looks "favorable." While the Street is projecting international net adds at only 7% above the first half of year, the analyst thinks there is at least 10% upside to international net adds given the company's library advantage internationally, history of recovery following "lumpiness" in the business, and a solid originals slate. 2H18 SETUP FAVORABLE: Netflix's shares are down 17% since missing its guidance on both international and domestic subscribers by about 500,000 each in the second quarter, William Blair's Schackart pointed out in a research note this morning. However, the analyst highlighted that the company only missed its subscriber guidance in four of the last 22 quarters, and its seasonally weak second quarter is responsible for two of those four misses. Overall, Schackart argued that the setup for second half of 2018 looks "favorable." While the Street is projecting international net adds in the second half of the year just 7% above the first half versus a four-year average of 43% growth from second half to first half, he believes there is at least 10% upside to international net adds given the company's library advantage internationally, history of recovery following "lumpiness" in the business, and a solid originals slate. International streaming segment has been the major driver of subscriber outperformance, he contended, adding that data scrapper shows that Netflix's international library size is "compelling." For 2020, Schackart now assumes international subscriptions of 130M, 6.5M above the Street estimate of 123.5M. The analyst reiterated an Outperform rating on the shares. WHAT'S NOTABLE: Netflix is testing ads for its original content that will play in between TV episodes, Business Insider reported. Netflix users are not pleased, and took to social media this weekend to criticize the move, according to the publication. Meanwhile, Netflix is "testing the iTunes payment method" in 33 countries, according to TechCrunch, citing the company. Until September 30, new or lapsed subscribers in selected markets across Europe, Latin America and Asia will be unable pay using Apple (AAPL) iTunes and are instead getting redirected to the mobile web version to log payment details directly with Netflix, the report explained. PRICE ACTION: In morning trading, shares of Netflix have gained almost 4% to $340.27.