If you invested in Netflix Inc. (NASDAQ/NFLX) a few years ago, you are likely to be smiling now. Well, that’s exactly what billionaire investor Carl Icahn did. Last month, he said that he had sold the last of his shares of the on-demand video streaming giant. Analysts estimated that he took home a profit of at least $2.0 billion.
Netflix’s stock performance has been the most impressive among S&P 500 companies year-to-date. Since January 1st, the share price of Netflix surged more than 117%! Other U.S. stocks could only dream of such high levels of growth: the S&P 500 basically remained stagnant. See the chart below for Netflix’s outstanding performance.
(Chart Courtesy of Stockcharts.com)
Netflix’s Strong Subscriber Growth Story
Nothing excites investors more than the continued growth of a business. And Netflix is great at it.
The number of subscribers has been increasing at an impressive speed over the last several years. By 2012 the company had 33.3 million subscribers worldwide. The number increased to 44.4 million by the end of 2013, and to 57.4 million by 2014. The most recent earnings report suggests that Netflix now has 65.6 million subscribers.
Another highlight in growth is the company’s success internationally. In the second quarter of 2015, Netflix added 3.3 million new subscribers. Among those, 2.4 million new customers come from overseas.
Sharing Accounts? Not a Problem
There have been concerns about sharing accounts on Netflix. You see, Netflix’s standard plan allows two devices to stream at the same time. The company’s premium plan allows four devices to stream concurrently. The concern is that subscribers could share passwords with non-family members, and this would put constraints on subscriber growth.
According to a recent survey of more than five thousand Netflix users, 65% of Netflix users are sharing their accounts with others. Moreover, 19% of respondents said that they share with three or more people. Looks like a serious problem, right? Not really. (Source: Business Insider, July 25, 2015.)
If you combine the results of the survey with Netflix’s U.S. subscriber count of 45.6 million, there are actually 99.8 million Netflix viewers, which looks like a lot. But keep in mind that Netflix allows sharing among family members. Take the average U.S. household size of 3.1 members, and multiply by the number of subscribers, and you’ll see that the company would have allowed more than 141 million viewers.
The survey implication of 99.8 million viewers is way below the 141 million potentially allowed by Netflix. This finding confirms Netflix’s CEO Reed Hastings’s comment that password sharing is not a significant problem.
Netflix knows that for an on-demand video streaming business to succeed, it needs to have solid content. In this year’s second quarter alone, the company introduced original shows including Marvel’s Daredevil, Sense8, Dragons: Race to the Edge, Grace and Frankie, and Season 3 of Orange is the New Black.
Having more content is costly, though. The company’s bottom line and cash flow have been hit by the aggressive content investment plans. In the most recent quarter, Netflix’s net income came in at $26.3 million, a 63% decline year-over-year due to substantial investments in original content. The company also had a negative cash flow of $229 million in the period.
Future Expansion: China and India?
According to a study by research company Global Web Index, there are already tens of millions of viewers in countries where Netflix doesn’t offer its service. The study was based on a survey of VPN users, who could bypass the geographical restrictions and access content that was not available in their regions.
The study found that 29% of VPN users said that they had recently used Netflix. In particular, the percentage was 32% in India and 31% in China. The numbers suggest that Netflix already had solid followings in those two potential markets. (Source: Global Web Index, last accessed July 28, 2015.)
The company had attempted to enter China on its own, but it didn’t work. More recently, Netflix was in talks with Chinese online media company Wasu Media Holding Co. Ltd. With a local partner, Netflix just might tap into the market with the biggest population in the world.
If the company is successful, it would be an enormous catalyst for the stock. I wouldn’t be surprised to see shares hit $150, $250, or even more.