Credit: In an incredible turn of events, the shares of Netflix, Inc. (NFLX), the uncrowned king of the streaming industry, rocketed by 130% during 2015 - moving from $48.80 a share to $114.38 per share. When the shares of a company showcase such a performance, it’s bound to receive a lot of attention amid questions over whether or not such growth is sustainable. With its shares down by 15% year-to-date, let’s take a look at the factors which favor Netflix and what it offers to its investors.
1. Numbers Game
The company reported a revenue of $1.82 billion during 2015 compared to $1.48 billion in 2014, an increase of almost 23%, while its net income was $43 million, lower than $83 million during 2014. The phenomenon of online streaming or internet TV is growing bigger and Netflix is well-placed to reap its share of profit from during the coming years. Netflix now has a subscriber base of 75 million and expects to add another 6.10 million during Q1 2016, compared to a record addition of 5.59 million members during Q4 2015.
2. Stable U.S. Markets
While U.S. remains its largest and highly penetrated market, Netflix admits that these markets are already well-explored, and thus may result in periods when the company reports a drop in net additions compared to previous years. The company is committed to working on strategies that would keep “the U.S. contribution margins growing, despite lower membership growth.” Netflix believes that the attractiveness and market size of the U.S. internet television segment remains intact; the company sees itself reaching 60-90 million homes in the U.S. over the long term and targets U.S. contributions at 40% by 2020, up from the current 34%.
3. Growing International Markets
International market is the ‘new engine’ for Netflix’s growth. The company announced its expansion into 130 countries in early January, which broadens its reach to 190 million broadband homes. This is over and above the 360 million counted at the end of 2015, taking the total figure to 550 million homes. China, the country with the highest population in the world, stays as an exception, where Netflix isn’t available.
During 2015, there was an addition of 30.02 million international members compared to 18.29 million in the previous year. As Netflix is aggressively working on its expansion, the same is likely to keep its operating income subdued during Q1 2016, especially on the back of the current currency trends. Netflix anticipates its Q1 international losses at about $114 million. A global presence presents a great growth path for the company, but its real benefits would only be reaped in time, as the company learns, adapts and caters to the needs of such markets. While the long-term outlook for revenue potential is strong, Netflix will have to bear the financial burden of expanding outside the U.S. in the medium term.
4. Content
Netflix’s original content has been loved by its subscribers and helps it to maintain a competitive edge in the market by attracting more people to its platform. During 2016 there are plans to release 600 hours of original programming, up by 150 hours in 2015. Netflix isn’t just working on increasing the sheer volume of content; it is also widening the breadth by bringing in a range of programs.
5. Better Services
Netflix is innovating to bring the best results to its subscribers by focusing on new languages, payment options and more features to satisfy the needs of different people across the globe. For this, the company is entering into new partnerships with mobile and TV operators, as well as device-makers. It’s also working on improved mobile experience, as mobiles are one of the primary mediums of accessing the internet in many countries.
6. OTT TV Growth
According to a report, “the subscriber numbers to 'over-the-top' (OTT) TV services such as Netflix and Amazon Prime will increase from 92.1 million in 2014, to 332.2 million globally by 2019.” While North American market will remain a leading region in terms of subscriber numbers, it will be closely followed by others, especially Far East as this region is fast emerging on the wings of new services and increased consumer interest.
According to a report, the entire over-the-top category is growing as consumers increasingly embrace internet TV and on-demand viewing. The share of peak download internet traffic in North America was dominated by OTT video at 61% in 2015, compared to 54% in 2014.
7. Dominant Player
The online streaming industry is attracting new players, increasing competition. There is pressure from Amazon.com, Inc. (AMZN), Hulu, Time Warner, Inc. (TWX) and now even AT&T, Inc. (T), which is planning to enter the arena with three ways to access and stream DIRECTTV video content by Q4 2016.
According to Netflix, “Internet TV will likely have multiple winners as the various services are not direct substitutes for each other, given differing sets of content.” According to a Neilson report, Netflix currently dominates with 44% share among the US households, which have access to Subscription Video-on-Demand services, followed by Amazon at 19% and Hulu Plus at 10% during Q4 2015.
Netflix analyzed how it performed against other activities that consumers engage in during their leisure time, such as video games, watching linear TV, etc. According to Netflix, “Given the broad array of options, we are privileged that our members around the world continue to devote more time to Netflix, streaming 42.5 billion hours in 2015, up from 29 billion hours in 2014.”
Final Word
Internet TV is the future, but won’t work on a monopolistic model; it has enough room for different companies to co-exist. While Netflix offers huge long-term potential, its problem lies in the unprecedented rally it underwent during 2015, which has already factored-in high growth potential. Under this scenario, it will be wise if investors go in gradually on the stock; entering on dips than grabbing a bunch of it in one go.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
