New York City, New York – (StockNewsDesk) – 07/22/2014 — Netflix’s recent earnings announcement was further confirmation that the company has fully recovered from its missteps in 2011. The company reported $1.34 billion in second quarter revenue, an increase of more than 36% from 2013 second quarter. Additionally, they announced passing the 50 million subscriber mark, a historic achievement for the relatively young company.
The biggest source of revenue growth for Netflix came from international revenue as the company has pushed into new markets. The company has mainly focused on attracting US subscribers, but has reached a saturation point domestically. As a growth stock with a high valuation, Netflix continues to focus on expanding its reach across the globe.
This approach comes with some short term sacrifice in earnings, as the company’s net income came in at $71 million, which fell short of Wall Street expectations. Investors are betting that the company’s strategy to acquire subscribers will pay dividends in the future.
Currently, investors seem more focused on subscriber count as a metric for Netflix’s quarterly earnings rather than profits, befitting a momentum stock. By this measure, Netflix impressed as it added almost 1.7 million subscribers, with most of them coming from the untapped overseas market. The foreign adoption of Netflix is a promising sign that the company will able to continue its stellar growth of the past few years. Currently, only a third of Netflix subscribers are from overseas.
Another successful recent move by Netflix that has attracted subscribers has been its foray into original programming. Initially, the move was viewed skeptically; after all, movie studios and television networks have a difficult time on their own creating hits. Netflix decided on a revolutionary approach by integrating its own data on its users and entrusting showrunners with considerable latitude to realize their visions.
Many of their shows have become commercial and critical successes, most notably House of Cards and Orange is the New Black. Specifically, these shows have become cultural phenomena, making a Netflix subscription a must have in many households that enjoy high brow TV.
Due to hit these shows, Netflix has managed to weather a shrinking of its film library as deals with movie studios expired. The company is also facing competition from Amazon Prime, that is also investing in its own original programming, as well as competing for content, driving up the price to streaming rights for films. Other sources of competition beyond traditional TV networks include Hulu, iTunes, and premium channels, such as HBO or Showtime.
Looking ahead, Netflix projected revenue of $1.2 billion for the third quarter with net income at $55 million. More important, the company expects subscriber growth to continue by adding another 3.74 million subscribers, almost half coming from abroad. These projections seemed expected for investors as the stock remained steady after hours.
Netflix will be entering major European markets in the third quarter, as well – Germany, France, Austria, Switzerland, Belgium, and Luxembourg – totaling 60 million households. Currently, one in nine households in the US subscribes to Netflix; a similar ratio in Europe could see the addition of another 5 million households to the subscriber base.
Commensurate with international expansion, Netflix is also creating original programming suited for these new markets. They are looking to replicate the success of the original programming in the US that attracted many viewers in these newer markets, using a similar analytical approach.
Netflix has been one of the leaders of this bull market, and its stock has climbed more than 16 times from the bottom in March 2009. Here is a ten year monthly chart of the stock:
The appreciation in the stock price is also reflective of the successful pivot of the business from a DVD by mail rental company to an online streaming company to now a producer of original content. The company’s most famous misstep occurred in 2011 with its attempt to break the company into two parts – one for streaming and one for its by mail business.
The stock fell almost 80% in less than a year, and its failure was lampooned by many media outlets and comedians.
Investors are clearly betting that the company will continue to successfully execute its strategy amidst a more competitive environment with its unique mix of original programming and licensed content. The next step is for Netflix to replicate its ratio of subscribers to households in international markets.