This Could Be a Huge Catalyst for Netflix Stock
Netflix, Inc. (NASDAQ:NFLX) has been an awesome stock. But it’s got a problem—generating new growth in a marketplace it already owns. It’s the classic growth stock conundrum. NFLX stock has already gone up on the stock market; it’s expensively priced and investors won’t accept anything less than “outperformance.”
U.S. subscriber growth in the company’s most recent quarter is what set the stock into its most recent correction.
Netflix is still very much a growth business and it’s proven before that it can reenergize its business to beat the Street.
But attracting new subscribers on a global basis is proving to be more and more expensive for the company. As significant new dollars get ploughed into new content and marketing to get new subscribers, the company is left with only one trick to boost its bottom line.
Netflix Has Only One Tool Left to Boost Earnings
At the end of September 2015, Netflix has about 43 million domestic streaming customers and 26 million international streaming subscribers.
The company’s domestic DVD-by-mail business represents only about nine percent of total revenues. And it’s not a metric that the Street worries about.
But it’s plain to see in Netflix’s financials that international subscriber growth is expensive for the company. Domestic streaming and DVD-by-mail makes a decent profit, but international operations do not.
The chart for NFLX stock is featured below:
Chart courtesy of www.StockCharts.com
In its most recent quarter, the third fiscal quarter of 2015 ended September 30, 2015, Netflix’s total streaming memberships on a worldwide basis improved 30% over the same quarter in 2014.
Revenues improved 23% during the last quarter, but total operating income declined 33% and net income fell 50% on a comparative basis.
So, what I believe is coming down the pipe for Netflix customers are more streaming rate increases.
Rates for new domestic customers and some new European customers have been going up lately. Existing subscribers have been grandfathered for a year, but this is how Netflix is going to try to improve its bottom line.
It’s a very similar strategy to what the restaurant industry does with new store openings. Get new customers in the door with promotional pricing, then slowly increase selling prices to turn a profit.
Netflix Stock and the Opportunity Now
Near-term, this position is vulnerable.
The company is still a top-line growth story, but it’s maturity as a business is being met with increasing investor expectations for more earnings. Attracting new streaming subscribers on a global basis (through new content and marketing) is becoming more expensive.
But, as Netflix stock has proven before, it’s been able to surprise to the upside. And in doing so; investors came back to the stock.
This story is about to change from a top-line growth producer to one where shareholders want bottom-line earnings results.
Consumers are going to pay for it.