Today is a big day for Netflix, Inc. (NASDAQ:NFLX). The company just launched its on-demand video streaming service for Japan, marking its first foray into Asia.
The streaming video service has been growing rapidly in its existing international markets. In the second quarter of 2015, the company added a total of 3.3 million new subscribers. Among those, 2.4 million come from overseas. Note that Netflix did not add additional markets in the second quarter and all the growth came from existing markets.
Strong growth in Netflix’s international segment helped to drive the company’s revenue growth. In the second quarter, international revenue surged 48% year-over-year despite a negative $83.0 million impact from currency headwinds.
So what would happen when Netflix does enter a new market? Well, according to research company Global Web Index, the success of Netflix is almost guaranteed in many of its potential markets. (Source: Global Web Index, last accessed September 2, 2015.)
The idea is that internet users in areas where Netflix isn’t available yet are already finding ways to use Netflix. The study by Global Web Index 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 “nearly 3 in 10 VPN users in fact say that they have recently used the [Netflix] service, a figure which translates to tens of millions of individuals.”
Let’s take a look at the numbers from regions where Netflix is currently not available. In China, 31% of VPN users said that they recently used Netflix. In India, the percentage was 32%. These numbers suggest that Netflix already has a decent user base in two large potential markets.
Other than today’s launch in Japan, Netflix is scheduled to launch additional markets in the remainder of this year. In the fourth quarter of 2015, the company would start offering its service in Spain, Italy, and Portugal.
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Mind you, despite being the biggest player in the on-demand video streaming business, competition is getting intense, to say the least.
Companies in the industry are fighting for more subscribers. Most recently, Amazon.com Inc.’s (NASDAQ:AMZN) Amazon Prime Video announced that users can now download movies and TV shows to their smartphones and tablets for offline viewing, a feature Netflix said it would never allow.
This new feature would be great for users who want to watch their favorite shows when they do not have access to Wi-Fi, such as during a commute or on an airplane.
Netflix does not think this is something it needs to offer: “With internet speeds climbing and Wi-Fi available in more and more places, the ability to stream live wherever you are will make downloading less relevant over time. Our focus is on delivering a great streaming experience.” (Source: Business Insider, last accessed September 2, 2015.)
Companies are also competing for original content. And on that front, Netflix is in a good position. In July, Netflix earned a career-high 34 Emmy nominations, led by House of Cards and Orange is the New Black.
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Keep in mind that continuing investments in original content and global expansion would weigh on the company’s cash flow. In the second quarter, Netflix had a negative cash flow of $229 million, a worse amount compared to first quarter’s negative $163 million. This could also expand short-term operating losses. However, Netflix’s stock price suggests that investors care more about its growth potential rather than current financial performance.
How high could shares climb? I wouldn’t be surprised to see Netflix stock rally another 20%, 35%, even 50% this year.