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Netflix (NFLX) is trading 3% higher premarket after the company reported solid first quarter results with strong subscriber gains offset by a somewhat soft outlook.

First quarter earnings and revenue came in just above the company's forecast. Operating margins benefited from some spend shifting into the second quarter.

Netflix added 9.6 mln subs during the quarter, better than its 8.9 mln forecast as the streaming service added 7.86 mln subs internationally and 1.74 mln subs in the US versus guidance for 7.3 mln and 1.6 mln, respectively. Netflix now has almost 149 mln paid subs worldwide, up 25% yr/yr.

The company tweaked FY19 free cash flow (FCF) to ($3.5) bln from ($3) bln but reaffirmed expectations for FCF improvement thereafter while also reaffirming its operating margin outlook for the year.

Netflix guided second quarter EPS below estimates in conjunction with costs shifting from the first quarter, but the revenue outlook was in-line.

The second quarter subscriber outlook was a little light. Netflix forecasted 5 mln net subscriber additions, with 4.7 mln sub adds internationally and 300,000 in the US during the second quarter. The domestic outlook missed estimates while the international outlook was in-line. 

Netflix said that the response to its price increases has been in-line with its expectations, with no impact to gross additions and some modest short-term churn effect. The price hike digestion appears to have weighed on the domestic subscriber outlook.

Almost all the sub growth is coming from overseas as the US market is saturated. Slowing subscriber growth may be a concern but the conservative second quarter outlook seems likely to set up a positive surprise when the company reports in mid-July.

Investors seem to be looking past the soft second quarter outlook toward a better second half given the company's strong content slate in the queue.

Importantly, Netflix also said that it does not anticipate that new streaming competition from Disney+ (or anyone else like Apple) will materially affect growth "because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings."

Disney's foray into the streaming market has been highly anticipated. Netflix flexed its pricing power muscles last quarter and probably wouldn't have done so if it saw risk to subs in the US.

Netflix's massive head start in streaming means there remains a long runway for growth internationally. Meanwhile, the market is saturated before Disney+ even launches in the US. The company's argument that there is plenty of room for multiple players in the space seems to make sense. Netflix pioneered the massive shift from linear television to streaming. The company's leadership role in the space appears to be safe for some time, but the premium valuation may come under pressure in the future if subs start to decline in the US.

The ~8x sales multiple is far from cheap, but not expensive relative to valuations seen in the red hot software sector. However, the mega-cap stock will eventually have to scale to positive free cash flow to justify its +$150 bln valuation. That is currently expected to happen in the 2021/2022 time frame, but any material softening in subscriber projections would delay that milestone and weigh on the stock.