More Upside for Netflix Stock?
Of all the FANG names, Netflix, Inc. (NASDAQ:NFLX) stock is the one with the biggest chance to soar in the coming years.
I don’t mean 20% or 30%—I’m talking a climb of more than 100%.
Granted, 2016 has not been kind to Netflix, but there are a number of reasons why I think Netflix stock is poised to hit $220.00 per share by 2020. (Well, probably by 2018, but $220.00 by 2020 sounds better.)
This Is Why I Like Netflix Stock
It won’t happen overnight, nor should it. Netflix stock had a great 2015, soaring 132% to $114.38 per share. Over the same period, the S&P 500 lost 0.7% of its value and the NASDAQ advanced an underwhelming five percent.
This year, it’s been a different story. The company’s share price is down 10% year-to-date at $98.00 per share. Simply put, Netflix stock’s price has been on a rollercoaster ride in 2016, but it’s shown itself to be extremely resilient, rebounding from the global sell-off at the beginning of the year, its less-than-stellar outlook, and the Brexit vote.
In the company’s first quarter (ended March 31), investors were disappointed with Netflix’s weak subscriber forecasts. In fact, they were so disappointed that they sent the company’s stock spiraling nearly 10% in mid-April. This was despite the pick posting solid year-over-year revenue and earnings growth. (Source: “Letter to Shareholders,” Netflix, Inc., April 18, 2016.)
While the company’s share price remains depressed, it is widely expected to beat new subscriber expectations when it announces its second-quarter financial results next week. This will inevitably lead to a short-term knee-jerk reaction by investors. However, the Netflix stock price’s ascent to $250.00 is not a short-term journey. Buy-and-hold investors shouldn’t be too concerned about the day-to-day fluctuations.
It’s All in the Numbers for Netflix Stock
In the second quarter, Netflix expects to add 500,000 new domestic subscribers, which is in line with recent quarterly additions. It also expects to add two million international subscribers, down from its 2.4 million international additions in the prior-year period.
It’s this guidance that scares investors. After all, the more people watch Netflix, the more money it makes. Once it saturates the market, it’s going to be tough to significantly increase its quarterly earnings. Netflix is already the world’s leading Internet TV network with over 81 million members in more than 190 countries. What else can it do?
For starters, 81 million members is still a pretty small number. There’s plenty of room for growth. In fact, Goldman Sachs thinks the company’s international subscriber base, which stood at 34.5 million at the end of the first quarter, will triple in four years to 125 million. (Source: “Here’s how Netflix will take over the world,” CNBC, July 14, 2016.)
Netflix certainly has some hurdles internationally. In early January, Netflix announced it launched its service globally to more than 130 new countries around the world—but not all countries. Netflix is not (yet) available in China, the world’s most populous nation. (Source: “Netflix Is Now Available Around the World,” Netflix, Inc., January 6, 2016.)
Despite holding the 2008 Summer Olympics and the 2022 Winter Olympics and promising to be more transparent, China still seems to fear a little competition. Naturally, Netflix is going to diplomatically try and break down the barriers, something Facebook, Google, Line, and numerous other companies have failed to do.
Succeeding to do so would definitely help boost the company’s international membership, though. And it’s already laying the groundwork. In addition to adding Arabic and Korean to the languages Netflix supports, it also added simplified and traditional Chinese to the list.
Netflix is also not available in Crimea, North Korea, and Syria—though that’s for political reasons (U.S. government restrictions on American companies).
The Stealth Catalyst for Netflix Stock
Here in the U.S. and in countries like Canada, Australia, New Zealand, and the U.K., Netflix memberships will climb if they can watch what they want. For example, it must be pretty depressing to be a Netflix subscriber in Canada and know that your Netflix catalog is smaller than those in Cuba, Haiti, Montserrat, and Venezuela. (Source: “Canada’s Netflix catalogue is smaller than those in Haiti, Cuba and Belize,” Cantech Letter, July 14, 2016.)
If you build it, they will come. In the case of Netflix, if you show what people want to watch, they will come. Netflix has a lot to do if it wants to attract more members in the countries in which it can already be accessed, especially as competition in the streaming space grows.
That said, when it comes to original shows, you can’t say Netflix doesn’t give people what they want here in the U.S. Netflix premiered its first original show in the U.S., House of Cards, in 2013. Over the next few years, Netflix has grown into a programming juggernaut. In fact, it leads the 2016 Emmys for streaming with 54 nominations. In 2013, it had just 14 nominations and three wins. (Source: “Emmys 2016: The Full List of Nominations,” Hollywood Reporter, July 14, 2016.)
The Netflix stock price may have fallen more than 10% since the start of the year and is down 26% from its 2015 highs, but this is one of the few times when you can say NFLX stock is under undue pressure.
The company’s international memberships are growing, from 36.3 million three years ago to 81.5 million in the first quarter of 2016. Specifically, the company added 4.51 million new international members in the first quarter compared to 2.6 million in the first quarter of 2015.
The company’s international market has opened up in January and only China (when it comes to numbers) is left to conquer.
The Bottom Line on Netflix Stock
With cable and traditional TV fading fast and the on-the-go ease of mobile on the rise, streaming companies like Netflix stock will be the ones to profit. As the first company out of the gates, Netflix has an advantage over its competition. It has better brand recognition, a bigger international presence, a growing membership base, exclusive rights to many of the biggest shows on TV, and popular, original content.
The recent dip in the Netflix stock’s price isn’t reason to run. Instead, it could be an attractive entry point. In just a couple years, a $220.00 Netflix stock price isn’t out of the question.