How Netflix Is Breaking In to International Markets

Netflix (NASDAQ: NFLX) has seen outrageous growth since it went public and has very likely hit market saturation here in the United States. For it to keep seeing those same growth numbers, it's going to have to branch out into international markets -- and the company knows it.

In this clip from Industry Focus, our cast explains how Netflix is working itself into markets around the world, and why its success so far has investors optimistic about the company's potential. Find out how Netflix is doing so well in Brazil, how Netflix has to approach international markets differently from domestic ones, some unexpected upsides from Netflix's international content production, and more.

A full transcript follows the video.

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This video was recorded on Oct. 13, 2017.

Dylan Lewis: Danny, we teased up that Netflix has really never looked cheap on a standard valuation basis. But even with this point that we're getting to, where the U.S. market is becoming increasingly saturated -- we talked about how they're at 50% penetration, maybe that ceiling is somewhere in the 60% range -- we're still looking at a company with a P/E over 200, and a price-to-sales of over 8 on a trailing basis. So, there are some big, big growth expectations still built into this stock. For them to really live up to that, the international markets are going to have to come through for them, right?

Danny Vena: Absolutely. The old saying goes that past performance is no guarantee of future results, so we'll get that out of the way right at the front. But, I think if you look back at some of Netflix's more mature international markets, we can use that as a guide to see how they will progress in the rest of the world. And one of the company's more mature international markets is Brazil. If you look at how the company has done in Brazil, what we're looking at, we're going back to a survey that was conducted by RBC Capital, Mark Mahaney, in his survey he found a record-high 77% of surveyed Brazilians watch Netflix, up from 71% the year before. 77%.

Lewis: You think about that timeline we're talking about here, this is a recent note. The company really first got into that market in 2011. So, this is something that's taken five years to get to this point. And you look back at their decision to really massively expand, I believe that was in 2016 that they made the announcement that they were effectively going into 190 countries, that might give you this immediate shockwave-type growth expectation. But the reality is, this is something that takes several years to build out, even though it's a very scalable tech platform.

Vena: That's true. A lot of what happens is, Netflix will invest in some content, they'll get into the market, and then they'll learn about their customer base there. And what works in Brazil may not work in Germany, may not work in France. So, they cater to those local markets. Those local geographies end up getting a much different experience, just depending on what their customers want.

Lewis: And really, for them to have a lasting effect and establish a big footprint in these markets, localized content plays a role. You can only port over so many English-speaking titles to foreign countries and have it be translated before people decide, "OK, we want content that's also made for us, or that's designed to be in our language and is acted out that way." So, those type of content investments the company is making, that's part of that growth ramp that we see over the couple of years.

Vena: That's true. I remember listening to Reed Hastings, Netflix CEO, talking at an industry conference or something, I don't remember exactly what it was. But, he pointed out a program called "3%." The program "3%" was one that they did specifically for the Brazilian market. But, what they found was, not only did it do really well in Brazil, but there were pockets all over the world that really liked that show. That show did well in the United States, it did well in Germany, it did well in several other geographies. So, I think that's one of the things that's going to serve them well going forward. Sure, they cater some of these programs to the local markets, but really quality programming is going to translate across the globe.

Lewis: And you look at the way that platform is built, you have video content, which we've seen over decades as very strong to consumers -- you look at the strength of the cable business for such a long time, and how appealing that is. And then, you also have this data analytics platform that shows exactly what people are watching, how much of it they're watching, in all these local geographies. Having all of that underlying data is huge for them in making content decisions, and understanding what they need to promote in some of these local markets to increase the use case and the value that their service is providing for people in those markets.

Vena: One of the ways that shows is when you look at the customer satisfaction ratings. For instance, in Brazil, 90% of the users in Brazil were either extremely satisfied or very satisfied with the service, and 66% of them said they were not at all likely to cancel the service. So, that's an extremely high level of customer satisfaction.

Lewis: And that's one of the things that has made their free trial so compelling to people. You think about the number of businesses that give something away and don't wind up retaining customers. That's actually one of the big issues with recent IPO Blue Apron, they have these very high customer acquisition costs because they give away meal kits to get people to try the service. The problem is, it's very easy for someone to do that for a couple of weeks and then decide they're not interested. But, by giving people a lens into what's behind that trial wall, and get to try out all their Netflix originals, be able to watch some of their favorite shows like The Office or How I Met Your Mother or something like that on demand, that becomes something you get very used to very quickly, particularly for the content you can only get at Netflix, it makes it pretty easy to fork over $10 or $12 or $14 a month for access to all that content.

Vena: That's true. One of the things that I find that's really compelling about this story, we keep going back to Brazil, but Brazil is a country, if you go back and look over the last five or six years, the country has been embroiled in political instability, there's been scandal after scandal, there's been bribery accusations against high government officials, there's been high levels of inflation, they've been in a recession for the last two years. And yet, with all that going on, Netflix has been experiencing explosive growth in the area. So, I think the value proposition is there. Even if people can't afford a lot of luxuries, they can afford $10 or $11 a month for streaming Netflix.

Lewis: Yeah. They're coming in at a great price point, even in a market like Brazil that's experiencing some issues.

Danny Vena owns shares of Netflix. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.