Netflix Looks to Break Higher, Distancing Itself from Rivals
Netflix, Inc. (NASDAQ:NFLX) traded at a record high of $148.29 on March 30, and it could take a run at $150.00 if the first-quarter numbers are strong. NFLX stock is well up from its 52-week low of $84.50, easily beating the S&P 500 and the NASDAQ 100 during the past year.
When Netflix reports on April 17, the market’s focus will not necessarily be on the typical revenue and earnings results, but on the growth metrics related to its subscriber base.
For companies like Netflix and those in the social media space, it’s all about the subscriber base and the company’s ability to push it higher. Yes, it is important to beat Wall Street estimates, but the reality is that investors want to see whether the user base is growing.
In the case of Netflix stock, the company is facing tougher competition from the likes of Amazon.com, Inc. (NASDAQ:AMZN), Hulu, LLC, and Home Box Office, Inc. (HBO).
Netflix will also need to fend off the massive reach of Alphabet Inc (NASDAQ:GOOG), which has launched a streaming TV service on its highly popular “YouTube” platform. The project is only at its initial stage, but could prove to be a real threat down the road.
To date, Netflix remains at the top of the pecking order, servicing 93.8 million members at the end of 2016, up a net 19 million members in the year.
As you look at the first-quarter results, notice the subscriber base and growth in the U.S. and international markets. Take a look at the following statistics that reflect the steady increase in the number of Netflix memberships over the past five quarters.
Netflix continues to be powered by the growth in its international membership base, which is easily outpacing its domestic growth. This is likely due to the absence of major competition in markets outside the U.S. but, of course, this could change, so Netflix needs to be on guard to defend its territory.
Total Membership (Millions of Users)
- 2015 Q4: 74.76
- 2016 Q1: 81.50
- 2016 Q2: 83.18
- 2016 Q3: 86.74
- 2016 Q4: 93.8
(Source: “Fellow shareholders,” Netflix, Inc., January 18, 2017.)
The following numbers reflect the impressive membership growth outside the United States.
International Membership (Millions of Users)
- 2015 Q4: 30.02
- 2016 Q1: 34.53
- 2016 Q2: 36.05
- 2016 Q3: 39.25
- 2016 Q4: 44.37
NFLX Stock on Right Path to More Gains
For the first quarter, Netflix is estimating 99 million members, representing an additional 5.2 million memberships on a year-over-year basis.
The breakdown is as follows:
- Domestic membership is 50.93 million, up 1.5 million;
- International membership is 48.07 million, up 3.7 million.
Note the major narrowing of the membership base numbers, with the international membership nearly catching up to the domestic base. Based on the trend, we could see the international base surpass domestic users by the second quarter.
Also note the continued superior membership growth in the international segment. Another way to look at it is the comparative growth from the first quarter of 2016 to the estimated first quarter of 2017.
- International membership growth is +39.21%
- Domestic membership growth is +8.43%
The key for NFLX stock is to strengthen the contribution margin (CM) as far as the international business goes. This would translate into improved overall margins and profitability, which would help drive the NFLX stock price higher.
In the fourth quarter, the CM was 20% for total revenues. The domestic unit produced a CM of 38.2% versus -7.0% for the international segment. For the first quarter, the domestic CM is slated to rise to 41.3% while the international CM edges up to a muted 1.5%.
Netflix has plans to invest heavily in its international operations, which will continue to pressure the CM. The key will be for the membership growth to be strong.
The company plans to spend over $6.0 billion on content this year, up from $5.0 billion in 2016. This will be critical to stay ahead of the competition. Of course, having top-rated shows will also help.
Chart courtesy of StockCharts.com
The above NFLX stock chart shows the attempt for a sustained breakout at $145.00, away from the current sideways channel.
Netflix stock is hovering at the 50-day moving average (MA), with target break at $150.00 to establish a new higher trading range.