Netflix (NASDAQ: NFLX) just closed the books on a record fiscal year that added 19 million streaming members to its rolls. Yet with growth slowing in its core U.S. market, and with no new geographies left to conquer (except for China), some investors are concerned that there's little room to add to its near 100 million subscribers -- and $61 billion market capitalization.
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Below, I'll highlight a few of the biggest factors that suggest those worries are overblown.
Netflix's fourth-quarter subscriber growth figures blew away expectations as 7 million people signed up for it service compared to the 5 million that CEO Reed Hastings and his team had forecast. That outperformance allowed the company to post another year of accelerating global gains: Net additions were 19 million in 2016, up from 17.3 million in the prior year.
Annual subscriber gains. Chart by author.
The raw growth story would be impressive enough on its own, but Netflix also demonstrated strong pricing power in this report. A big chunk of the U.S. member base was pushed onto higher-priced plans last quarter, which prompted users with a good reason to cancel. Instead, not only did most members stick around, but there's evidence that many customers who recently bolted over the price increases decided to come back.
In other words, TV fans are finding that Netflix's value proposition is compelling, even at the higher pricing point that has pushed average monthly spending up 15% and allowed profitability to jump to almost 40% of sales in the core U.S. market.
In early 2016, the company sped up its global expansion plan by simultaneously launching in nearly all the markets it wanted to enter. There's nothing approaching that type of event in the future, and so international subscriber growth is likely to trend lower over the short term. Next quarter, for example, Netflix is forecasting 3.7 million new users, compared to 4.5 million additions in the prior-year period.
Image source: Netflix.
The global growth story stretches out far longer than just a single year, though. Almost 20 quarters after launching in Latin America, Netflix is finally getting up to speed in that market, and there's every reason to expect a comparable learning curve in other areas as it tweaks the service and builds brand strength.
The company sees a huge long-term opportunity in Japan, too, but the biggest payoff there will come once the company is more established and has compiled a deep enough portfolio of local content. It won't be as dramatic as going live in 130 countries at once, but Netflix has a huge runway for international growth ahead.
Hastings and his team have been prioritizing subscriber growth over earnings for the last several years. The thinking behind that strategy was that Netflix first needed to establish global scale to block out rivals. Only then would it use its dominant position to extract meaningful profits for investors.
We're finally entering the second part of that master plan -- and investors must be pleased. Netflix is finding that original shows and movies travel well across borders, which is giving it a key advantage in the bidding war for content against streaming studios that have to piece together rights on a region-by-region basis. The efficiencies are a key reason why it plans to scale back on marketing spending while doubling operating profitability this year.
Amazon (NASDAQ: AMZN) is no longer in that regional category, having recently matched Netflix in global availability. But few other streaming specialists can hope to even approach the $8 billion in spending ($6 billion on content alone) that Netflix will shell out on its service this year. And at some point, the online retailing titan might even balk at the expense of keeping pace with the streaming specialist.
A full decade has passed since Netflix tiptoed into streaming video in what Hastings predicted would be the company's second act after dominating DVD rental. Yet its surging growth over the last 12 months looks more like the beginning of that new chapter than its conclusion.
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