[NFLX] is an internet streaming media provider worldwide as well as a DVD-by-mail in the US. Netflix has subscribers in over 40 countries at this point in time and they look to make this number even higher in the near future. Recently, Netflix has begun to create original TV shows that are only available through their streaming company which has differentiated their product from similar streaming services and has resulted in many more subscribers.
Netflix's aggressive expansion into Europe and other foreign markets will undoubtedly heavily boost their subscription base and revenue, with expected international revenue (FactSet Research) twice as much as last year, at $1.3 B and $2 B, for 2013 and 2014, respectively. The move into Europe, especially France and Germany which provide a combined population of 147 million, will offer a measurable to compare to, at the very least, for expanding in the future. New markets require a different product from Netflix, so it'll be easy to tell whether or not they are capable or matching the cultural tastes of different countries within the next few months. The international segment's losses are shrinking quickly as the subscriber base grows. The international operations are continuing to grow toward profitability with an even larger income stream than before, which it will utilize to invest in content and further expansion.
One of the main reasons behind Netflix's success and rapid growth is the popularity of its original content. The original series that Netflix has come out with, notably House of Cards and Orange is the New Black, have received over 80 nominations including 14 Emmy nominations. Accolades such as these make a subscription to the company all the more desirable and statistics have shown that increases in subscriptions directly correlate with popularity of their original content. As of now, Netflix spends about 5% of its content budget on original content, an expense that Netflix plans to double moving forward.
Netflix has effectively used pricing points in order to entice customers to use their product over their competitors. With the many options available for online streaming, very minor differences in prices can make a huge difference, and Netflix recognizes this and has used it to their advantage. Their price of $7.99/month is the industry low and they offer arguably better content then the rest. There have been rumors of offering differently-priced plans in order to accommodate for their diverse customer base, which would be unique and surely profitable for the company.
Many people point to Amazon and Time Warner as competitors who have a better chance at thriving. Amazon Prime Instant Video has many more subscribers as well as more content (40,000 more television shows and movies). Time Warner recently released that they will offering a stand-alone HBO streaming service in 2015, which Netflix has identified as a threat. But the misperception is here is that many look at these competitors similarly to way they would look at competitors of an automobile or technology company. The main difference here is that Netflix can thrive in the face of competition. CEO Reed Hastings said, "On the consumer side, it's one more channel. So already consumers subscribed to us and Hulu and Amazon and they do pay-per-view and they do DVD and they do cable. So there's so many great sources of entertainment. And consumers subscribe to many of these. So there's not much of a change in the direct competitive landscape. We and HBO have completely different content. So I don't think it will be a significant impact at the consumer level." In addition, let's not forget that at the end of that day, quality content will have success, and Netflix is building a strong product differentiation with their original shows that have won awards.
Many investors have not been pleased with the recent quarters that Netflix has had during their expansion. They suffered losses while moving into European markets and many are questioning if the operation is worth it. These losses are quickly turning around and have decreases each month in the fourth quarter. Expanding is never as smooth as planned and investor patience is necessary in order for the company to have global success.
How It Plays Out:
Netflix's huge overnight stock dive in mid-October due to the Q3 earnings report came as a huge discouragement to investors, and the stock price has been declining ever since. This momentous drop seems to be overenthusiastic considering the company is in the middle of large scale expansion and wasn't expecting too high of earnings as it was.
We need to buy Netflix sooner rather than later because as soon as more original content comes out and an increase in subscriptions ensue, it will be too late. Not only this, but also I have confidence in Netflix's ability to assimilate to foreign markets and have success, leading to a much larger revenue stream. But once again, if we buy now we can watch the stock price rise with the success in Germany and other places, before it is too late.
When Netflix first began, its revenue came from its DVD delivery service, an aspect of the company's business that is slowly and inevitably diminishing. While the world moves to streaming, Netflix will still be able to provide the products to the demand, but the income margins on streaming are nowhere near that of DVD delivery (around 50% compared to 20%) so Netflix will be sure to see a decrease in net profit margin. While this is going on, international streaming has not been profitable all, so a lot of investors see too much risk to make Netflix a good long.
Netflix has around $7.3 billion in off-balance-sheet content obligations. Netflix will have a very hard time repaying this when it only has $1.2 billion in cash and is only generating a little north of $100 million a year. Even if NFLX keeps adding subscribers and raises prices (which it will have to do eventually), it will prove very difficult to meet these obligations (even with additional equity or debt capital raises).
Earnings is definitely the key metric that we need to monitor looking forward. Earnings is what caused the huge overnight dip in October and it is something that all investors want to see, especially internationally, for the sake of the company's future.
Overall health of the economy plays well into the stock price of Netflix, for if people have more time and money, they are more likely to spend on leisure items, such as Netflix.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.