Netflix Stock Depends on User Growth. It’s Already on the Way
Investors always knew that Netflix, Inc. (NASDAQ:NFLX) could be good for their portfolios. After all, Netflix stock, despite it losing almost a fifth of its value in the past year, has still managed to gain 43% in the past five years. By comparison, the S&P index has risen by a measly 15%. Netflix kept reporting user growth and all the right things that investors expected. But, in 2016, the stock just failed to respond, apart from some lukewarm rallies.
That is about to change. Savvy investors always knew that Netflix stock had value, and that it was good. They just wanted it to be great as its potential. They’re about to be served, because user growth was up spectacularly beyond the United States, its biggest market (for now).
Netflix’s Results Beat the Most Optimistic Expectations
On October 18, Netflix announced its third-quarter results. NFLX stock gained a cool 20% and was trading at about $120.00 per share. That’s not far from its record high of $130.93, set last December. However, in the third quarter, the video on demand service beat growth forecasts for subscribers. This happened especially in international markets, reassuring some investors who were concerned that the content would not have as much appeal.
Perhaps the best part of that growth is that, despite its intensity (it added 3.2 million new users abroad against an expected two million), it still does not include China. The fact that Netflix stock, now boasting a market cap of $50.0 billion, could achieve what it has in user growth without China is remarkable.
Netflix has apparently given up on getting into China, where it would face heavy competition from local providers. But when the company eventually reaches that market, investors will be confident that Netflix has a fighting chance to survive, or better, to thrive. That’s the kind of greatness Netflix investors demand.
In the previous quarter, investors punished Netflix with a major case of the “disappointing results blues.” Netflix stock fell, but the change of tone isn’t sudden, even if the NFLX stock price increase over the past 24 hours may suggest as much. From July to last September, Netflix shares gained some 19%.
Yet, even as NFLX shares approach its record highs, the fact that investors did not get everything they wanted is a pleasant bonus. Such success would have made Netflix too valuable perhaps to ponder. Now it’s at a price that still leaves room for almost de-risked gains. Analysts were jumping over themselves to issue new and upwardly mobile prices on Netflix stock. The consensus target is at least $130.00.
It’s Not a Bad Thing that Netflix Has Not Achieved Its Full Potential Yet
Yes, it’s actually good news that Netflix still has some room to go before its earnings achieve their full potential. It’s good news because there is the reassurance that this will happen in one of the next few quarters. Revenue, after all rose, from $1.74 billion to $2.29 billion. And the guidance was also higher than expectations. Netflix expects to get more users both in North America and in other continents. Analysts see this as users having accepted the price increases.
More importantly, it means that Netflix’s rather common-sense strategy of offering more local content has worked in winning over subscribers globally. But this kind of strategy, as successful as it has been, is also expensive. Netflix said it may have to spend more on content creation, from $5.0-$6.0 billion.
But that’s what is needed to get the user growth, so few will complain. By the way, that strategy is working in the United States. Netflix users grew by 300,000 to 370,000 in the past quarter. Consider that this happened despite competition from similar services offered by “Amazon Prime,” “Hulu,” and others.
The number to keep in mind, which should excite Netflix shareholders, is that Netflix, which has about 83 million paying users, could soon reach the number of users on “Twitter” (who don’t pay anything to Twitter Inc (NYSE:TWTR). Imagine what kind of user numbers Netflix would get if it were free!