Brazil Shows Why Netflix Will Succeed Internationally

Published October 07, 2017
Motley Fool

Streaming pioneer Netflix, Inc. (NASDAQ: NFLX) has been among the market's best performers so far this year, increasing 46%. In its most recent quarter, the company smashed expectations, adding 5.2 million new subscribers, far exceeding the 3.2 million in its own forecast. This was led by more than 4 million new international members, exceeding domestic subs for the first time.

Slowing growth in its domestic market has some investors wondering whether Netflix can continue its torrid growth, and there are doubts the company can reproduce its domestic penetration on the global stage. However, a closer look at a couple of the company's earliest international markets may provide insight.

There's no place like home

Netflix has achieved over 50% penetration in its U.S. market, according to research conducted earlier this year by Leichtman Research Group: Its survey of U.S. consumers found that 54% of adults reported having Netflix in their household. This growth is slowing, however, as Netflix reported just over 1 million new domestic customers last quarter. The company and its investors are counting on international markets to propel future growth.

In a research note last year, Morgan Stanley analyst Benjamin Swinburne said that it takes three years for Netflix to accelerate its subscriber growth after entering a new market. "In all markets, three years or older, [Netflix] has reached well above double-digit penetration and is generating profits," he said.

Earlier markets tell the tale...

Netflix first entered the Brazilian market in 2011, but subscriber growth came slowly. It is important to note that for the last two years, the country has been embroiled in the depths of the worst recession in its history and the unemployment rate has been as high as 13%. Despite these recent economic challenges, consumers have been flocking to Netflix.

RBC Capital's Mark Mahaney revealed that recent surveys indicate a record high 77% of surveyed Brazilians watched Netflix, up from 71% in 2016. Additionally, 90% of users in Brazil were either "extremely satisfied" or "very satisfied" with the service, up from 79% in the prior year, and 66% of subscribers said that they were "not at all likely to cancel."

A similar though less striking result can be found in the U.K., where Netflix launched in early 2012. A comparable survey revealed that a record 49% of U.K. respondents used the streaming service, up from 42% in 2016, and a record 80% of reported being "extremely" or "very" satisfied with the experience. A full 59% of subscribers stated that they were "not at all likely" to cancel.

Deja vu, all over again

Similar surveys conducted over the course of 2017 in France and Germany, where Netflix launched just three years ago, show that the company is on track there as well. The data shows that Netflix has achieved 21% penetration in France and 17% in Germany, with 91% of French and 86% of German customers "extremely" or "very" satisfied with the service.

Netflix is duplicating the experience that worked so successfully in its domestic market, and Mahaney isn't the only analyst bullish on Netflix's international opportunity. Piper Jaffray analyst Michael Olson expects Netflix to exceed its forecast for subscriber growth again in the current quarter, and believes that international subscribers will top 100 million by 2020. Netflix itself expects its international markets as a whole to be profitable for 2017.

For Netflix, the world is its oyster.

10 stocks we like better than Netflix
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Netflix wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 5, 2017

Danny Vena owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.