Every stock carrying a triple-digit price-to-earnings (P/E) multiple is telling a growth story. But for a stock price to be sustainable at such a P/E, the story has to be convincing. Luckily, Netflix, Inc. (NASDAQ:NFLX) stock has a very convincing story.
This Could Be Huge for Netflix Stock
You see, user growth has been the key number for Netflix stock. However, investors also care about the bottom line. Fortunately, the company is promising something big. It said that it expects “material global profits beginning in 2017”—offering investors the best of both worlds. (Source: “Q4 15 Letter to Shareholders,” Netflix, Inc., January 19, 2015.)
How is the company going to do that? Well, first by becoming (almost) fully global. Earlier in the year, Netflix moved into 130 additional countries. Its on-demand video streaming service is now available everywhere in the world except China.
Now the big question is this: will the plan work?
As it turns out, there are already indications that international expansion is working for Netflix.
In January 2016 (the same month that Netflix launched in 130 additional countries), Netflix saw its biggest increase in app downloads. Moreover, international downloads surpassed U.S. ones for the first time. (Source: “Smartphone Stars: Netflix, Facebook and Alphabet,” Barron’s, March 11, 2016.)
Netflix stock bears might argue that this is no big deal because international growth was already faster than domestic growth. In the most recent quarter, the company added 4.04 million international subscribers, accounting for more than 72% of the total 5.59 million members added.
But note that even when international additions made up the bulk of membership growth in the past several quarters, there were still more app downloads in the U.S.
The giant surge in app downloads in January has two implications. First, it’s a sign that opening up 130 additional markets has brought in a lot more users than before. Moreover, it suggests that international growth in the current quarter could be significantly better than before—and before was already good.
By being a subscription-based service, more users will translate to higher revenue for Netflix. That makes the company’s projection of “material global profits by 2017” much more achievable.
The Bottom Line on NFLX Stock
Netflix is expecting 6.1 million net additions for the current quarter. Based on signs of huge global subscriber growth, that number might be on the conservative side. If the company indeed turns out to be growing faster than expected, NFLX stock could see some huge upside.