Where will Netflix go from here?
The sky is the limit if Netflix, Inc’s 2Q growth momentum is anything to go by. Saturation concerns in the U.S market is no longer a point of concern as the streaming giant’s investments on original shows and international expansion continues to pay off. The company now has more subscribers abroad than at home, all but putting to rest doubts about its ability to continue growing.
Subscriber growth overseas exceeds expectation
The company crushed Wall Street expectations once again, on the back of its rapid expansion in Europe and Asia. In the second quarter, the company added 5.2 million new subscribers beating its own expectations of 3.2 million new subscribers.
Netflix, Inc. now has about 104 million subscribers with the vast majority of new subscribers coming from its overseas markets. New monthly subscribers in non-U.S markets increased by 4.14 million in the second quarter. During the quarter, the company signed 1.07 million subscribers in the U.S beating analysts’ average estimates of 631,000.
International subscription base is now larger than the U.S, an indication that the company no longer has to rely on one market for growth. The company expects 4.4 million new subscribers in the third quarter, made up of 3.65 million from overseas and 750,000 in the U.S.
Netflix expects its international business operations to generate its first ever profits this year too, in addition to boosting its overall profit margins.
Subscriber growth abroad exceeding expectations also indicates the company’s offerings are seeing a strong demand, after a slow start. Growth in the subscription base should dispel concerns about the threat posed by other streaming companies gunning for market share.
There have been concerns that Netflix would struggle to compete against the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) which boasts of huge financial muscles. However, the fact that the company has successfully added more subscriber’s quarter over quarter further affirms the popularity of the brand all over the world.
Original content investment pays off
Big and bold investments on original shows continue to attract more consumers into the Netflix network. Production studios in France, Germany, and Spain have been active as they look to service the ever growing demand for local content. These investments have helped the streaming company attract new subscribers further strengthening its edge in the industry.
New seasons for popular shows House of Cards and Orange is the new Black continue to convince new customers of the need to pay for the service. The company’s library of content is second to none in the industry and expected to continue growing.
During the quarter, the company unveiled new shows like Flow and Dear White People as well as a new movie Okta and comedy specials from Tracy Morgan and Hassan Minhaj. The fact that Netflix won twice as many Emmy Nominations further validates its library.
“We believe the rapidly growing content offering, led by originals that in aggregate garnered 91 Emmy nominations last week, drove the stronger new sign-ups,” said Morgan Stanley analyst Benjamin Swinburne.
Netflix should continue to win over millions of people all over the world by betting on original shows. Chief Executive officer, Reed Hastings, admitted that they have a long way to go in bring more content online, affirming they are not planning to take a rest as peers play catch up. The company has already announced plans to spend US$6 billion on original shows, a move that only seeks to fend off competition for subscribers in the space.
Earnings and top line to keep growing, alongside capex
While the company has been criticised for paying too much for content, the same cannot be said of its 2Q performance. Shares of the company soared to an all-time high of US$178.55 a share after the company reported a 32.3% increase in revenues that came in at US$2.79 billion. Analysts were expecting revenues of US$2.76 billion.
Net income also soared to US$65.6 million, or 15 cents a share, from US$40.8 million reported last year. Netflix expects its 3Q revenue to increase by more than 30% to US$3 billion. Net income, on the other hand, should come in at US$143 million.
On the other hand, Netflix’s bid to strengthen its position in the streaming business has come at a cost. Increased capital spending continues to raise concerns on Wall Street, while competition in the industry could drive content costs up as well.
Regulatory censure at the back of the global expansion drive is another headwind that the company will have to navigate if it is to continue growing. U.S companies have come under immense regulatory pressure abroad as authorities seek to crack down on the amount of power they wield in the fields they operate.
However, Netflix, Inc CEO does not expect the company to come under scrutiny abroad given the investments they have made on local content production studios
“Think of us much more as trying to curate some of the world’s best content and share it with the world, versus the moniker of being a disruptive tech company,” said Hastings.
To that end, the Netflix stock has outperformed the market, having gained more than 50% since the start of the year. The big question now is whether it might be time to take off some chips even as the company’s long term fundamentals remain positive. There is no doubt that the company is set to come under immense pressure as the likes of Amazon and Apple ramp up their investments on new content.
The rate at which the company is burning cash also continues to rattle some investors who believe the model is not sustainable especially with the emergence of more worthy competitors.
“We think that Netflix, Inc is destined to be a cash burning high growth company until it changes its strategy and accepts its fate as a highly profitable slow growth company,” said Wedbush analyst Michael Pachter.