Netflix Q4 Preview: Strong International Growth Likely Continued Even As Domestic Business Matures

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Trefis
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Netflix

Netflix (NASDAQ:NFLX) is set to release its fourth-quarter and full year results on January 18th. [1]  While its domestic business has been stable over the past few quarters, the competition in the industry from companies with deep pockets is intensifying. However, as the company expands to the international market, the profitability will suffer, albeit at a slower pace. Despite the low profitability, Trefis expects that the Company will continue to report growth in subscriber numbers in a highly competitive market.

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Netflix’s International Growth Story Going Strong

Netflix’s international growth has been exceptional and the subscriber base has grown by more than 15 million in the last four quarters. [2] Additionally, the number of total subscribers grew by 53.6% to 36.8 million at the end of September 2016. The subscriber growth has been helped by the company’s aggressive expansion plan. The streaming service is now available in more than 190 countries across the world. While Netflix has been targeting the Asia-Pacific in a big way, it has been unable to make headway in China. The Asia-Pacific holds a lot of promise for Netflix as the region offers a potential target market of around 280 million households (assuming one high-speed internet connection per household). [3] We believe that Netflix will experience healthy adoption rates in the newly launched countries on the strength of its original content and its competitive pricing. We estimate that Netflix can cross 82 million international subscribers by the end of our forecast period.

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Netflix’s international operations are still unprofitable as the company continues to invest heavily in its expansion. Its margins have improved from -116% in 2011 to -13.7% in 2015. It further improved to -10.7% in the nine months ending September 30th 2016. [4] We believe that Netflix’s international segment will start to break even by 2017 and margins improved in Q4 2016. Going forward, Trefis expects it to stabilize at around 30% by the end of our forecast period in 2023.

Domestic Market Expanding, Albeit at a Slower Rate And With Higher Margins

The U.S. subscription services division makes up 66.6% of Netflix’s estimated stock price. Netflix’s domestic subscriber base crossed the 47 million mark this year and is still growing at a steady pace, having added 3.1 million new subscribers during the last nine months of 2016. [5] Trefis expects that this trend continued in Q4 and the domestic subscriber base grew in 2016, albeit at a slower rate. Additionally, Netflix’s domestic streaming margin has continued to improve and it grew year to date to 36.4% as of Q3 2016. [6] We expect that this trend continued in Q4 and the margins improved for FY2016 as well.

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Notes:
  1. Netflix to Announce Fourth-Quarter 2016 Financial Results, Netflix Investor Relations []
  2. Netflix’s Earnings Filings []
  3. List of countries by number of broadband Internet subscriptions, Wikipedia []
  4. Q3 16 Letter to shareholders, Netflix Investor Relations []
  5. Q3 16 Financial Statement, Netflix Investor Relations []
  6. Q3 16 Letter to shareholders, Netflix Investor Relations []