Netflix‘s (NASDAQ:NFLX) stock hit an all-time high on Monday as the company posted its first quarter results. The company’s international subscriber base increased at a rapid pace once again, while growth in domestic subscribers slowed a bit. Furthermore, the company’s margins improved to 9.7% in Q1 as some of its content (primarily House of Cards Season 5) moved from the first quarter to the second quarter. Nevertheless, the company’s operating margin is expected to be around 4.4% for Q2, keeping the company in line with its 7% target for the full year.
Based on Q1 results, we believe that Netflix’s overall subscriber base will continue to grow in the coming quarters due to its international expansion efforts, specifically as it targets the underserved Asia-Pacific region. However, the growth rate for domestic subscribers is likely to slow down, as the market is increasingly mature and competitive. The company expects to add 3.2 million subscribers in Q2, which would be a slower rate compared to Q2 2016.
Trends In Streaming Subscribers
|In Million||Mar-16||Dec-16||Mar-17||QoQ (%)||YoY (%)|
|US Paid Subscribers||45.71||47.905||49.38||3.08%||8.03%|
|Int’l Paid Subscribers||31.99||41.185||44.99||9.24%||40.64%|
|Paid Subs As A % Total||95.34%||94.98%||95.57%|
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Netflix’s International Business Grows At A Fast Clip
We estimate that Netflix’s international streaming subscription vertical makes up over 40% of the company’s value. Netflix’s international subscriber growth has been thus far very strong, as its subscriber base grew by 3.5 million this quarter, though that was slightly below the company’s forecast. The subscriber growth was lower than expected, as the base effect from expansion to 130 countries in January 2016 impaired perceived growth. However, the company expects that subscriber growth will continue in Q2. Furthermore, profitability from more mature territories offset investments in newer markets.
We believe that international subscriptions will continue to grow at a robust pace in the near, as the company now has a presence in 190 countries. We believe that Netflix can cross 110 million international subscribers by the end of our forecast period, as most of the regions in which Netflix has expanded are under-served.
According to our calculations, the monthly fee per subscriber for international streaming improved to $7.75, a jump of close to 14% year-over-year. We expect the figure to improve to $8.35 by the end of our forecast period.
Domestic Subscriber Growth Shows Signs Of Slowing Down
Netflix’s first-mover advantage has helped the company establish itself as the incumbent in the streaming industry in the U.S. However, the current market landscape is becoming increasingly competitive. Many content providers such as Dish Network, Sony, HBO, CBS and Comcast have thrown their hats into the ring, and incumbent players such as Hulu and Amazon have ramped up investments in order to improve the quality of their content. Despite the competition, Netflix was able to add 1.47 million domestic subscribers in the quarter, though again that was slightly lower than its forecast of 1.55 million.  Going forward, given the maturity of the market and the competition therein, the company will likely find it increasingly difficult to add new subscribers at a rapid pace. We expect Netflix to continue to add new users throughout our forecast period on the strength of its original content.
According to our calculations, the monthly fee per subscriber for U.S. streaming improved to $9.92, a jump of close to 17% year-over-year. We expect that the figure will improve to $12 by the end of our forecast period.
Marketing Costs To Impact Margins
Netflix is aggressively building its slate of original content, with an investment outlay of over $6 billion for developing new content. As its slate of content expands, the company plans to spend over $1 billion in 2017 to market its content and drive subscriber acquisition. This is likely to impact margins in 2017.
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