We are about 3 weeks out from seeing the most shocking and impressive earnings report to date, and here's why: No one is paying attention to Latin America.
It seems analysts and investors have a habit of focusing solely on American actives. Living in Canada, this has given me an edge on a few trades lately, including the success of Lululemon (LULU) as well as Limited Brands (LTD) and Crox (CROX). Each of these companies went through explosive retail expansion over the past two years in Canada which translated to impressive gains after reporting earnings each quarter. Wasn't it obvious that if they were opening stores in every mall that they were expecting to make some money off the lines of people waiting to enter them? Apparently analysts don't travel to Canada very often. Then came Netflix (NFLX). Now for this one, I felt I had an extra edge. I am a professional internet marketer who owns two online subscription companies distributing a digital product. Not only would I have the same front row seat in Canada to see how many people were signing up, I also have a back stage pass on how this particular industry works.
e-commerce success is an incredibly simple equation: the cost of delivering the product or service plus the cost of acquiring the customer needs to be less than the amount you are charging the customer. Generally in these equations, the cost of the product and the amount you are charging are fixed, so all you need to do is figure out your cost per acquisition, or CPA. This has created a massive new industry of CPA Networks connecting advertisers with publishers called Affiliate Marketing. Advertisers like Groupon say "I can pay $2.25 for an email submit" to networks who relay the message to their publishers who say "well, I can get them for $1.75!" and BOOM you get a few million new customers in a matter of days.
Here's the insight that it takes a savvy investor with an e-commerce and affiliate marketing background to realize about the Netflix situation:
- Cost per acquisition for Netflix (seemingly) becomes equal to the value of a new customer when about 1/15 people in a region have signed up.
- Cost per acquisition in LATAM (affiliate term for Latin America) is roughly 1/10th the CPA of customers in North America due to lack of competition for ad space.
- Netflix tested the market and kept prices the same in LATAM!
- Netflix just announced it has partnered with Facebook.
- There are 15 million Facebook users in Canada (half way to saturation).
- There are 155 million Facebook users in United States (saturated market).
- There are 135 million Facebook users in LATAM (went live 4 weeks ago).
- In the US there is about 1 user for every 8 Facebook users.
- In Canada, it took it 3 quarters to sign up 1 person for every 15 fb users.
I estimate that within 3 quarters it will sign up one for every 15 LATAM Facebook users, 9 million users, which will be much more profitable (at one tenth the acquisition cost) than its current users. I would not be shocked if it hit 20 million new Latin American users by mid 2013 and its net profit margins grow to 25%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.