The Factors Behind Netflix’s 60% Stock Rally In 2017

by Trefis Team
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Netflix (NASDAQ:NFLX) has seen its stock gain nearly 60% this year, significantly outpacing the S&P 500, which is up by less than 21% year to date. Despite stiff competition from the likes of Amazon and Hulu as well as local content providers in various markets, Netflix’s performance in international regions has been the primary growth driver for the company. In this note, we review the performance of Netflix’s business in domestic and international markets. Take a look at our interactive breakdown of Netflix’s business to learn more.

Our price estimate for Netflix stands at $181, which is slightly below the current market price.

Domestic Streaming Market Grew Steadily

According to Trefis estimates, the U.S. streaming subscription business accounts for around 55% of Netflix’s value. The company’s domestic subscriber base crossed the 50 million (paying subscribers) mark in Q2 and is growing at a steady pace. In the first nine months of 2017, it has added close to 3.34 million subscribers even though the competition in the online streaming industry is intensifying. Content providers such as Dish Network (NASDAQ:DISH), Sony (NYSE:SNE), Apple (NASDAQ:AAPL) HBO, CBS (NYSE:CBS), and Comcast (NASDAQ:CMCSA) have launched their own streaming services, while Disney (NYSE:DIS) plans to launch its own streaming service in 2019 after its deal with Netflix expires. Driven by the favorable secular trends within the pay-TV industry, as consumers increasingly cut the cord in favor of streaming platforms, Netflix’s domestic user base continued to improve in 2017.

Netflix was also able to increase the average fees paid by subscribers without any material impact on subscriber numbers last year. As a result, its average fee per subscriber has gone up by 12%, from $8.65 in 2016 to $9.7 in the first nine months of 2017. Starting in December, Netflix will again be raising prices for its U.S. subscribers. We do not expect these further price hikes to have much of an impact on the company’s churn, and as a result it should drive solid revenue growth starting next year. We currently estimate the company’s average fee per U.S. subscriber will be around $9.90 in 2017.

Another area in which Netflix is rapidly improving is the contribution margin for its domestic streaming segment. This margin improved from 14.3% in 2011 to nearly 38% in 2016, and continued its upward climb in the first nine months of 2017, standing at 38.1%. We expect the contribution margin to be close to 39% for full year 2017.

International Streaming Division Continued To Grow Rapidly

The subscriber growth in Netflix’s International segment has been very robustin recent years, with the total subscriber base increasing from 1.9 million customers in 2011 to over 44 million by the end of 2016. During the first nine months of 2017, the international subscriber base grew by 27% to nearly 56.5 million. The company now operates in 190 countries, and has seen a healthy adoption rate globally. We estimate that the company will have over 60 million subscribers for its international operations by the end of the year.

Netflix’s average fee per international subscriber has also gone up in the first nine months of 2017, following the same trend as Netflix’s domestic streaming business. The average fee per international subscriber improved by around 10% from $6.87 in 2016 to $7.54 in the first nine months of 2017. We expect that growth to continue going forward.

Netflix’s international operations are still not particularly profitable, as the company continues to invest heavily in its expansion. Its margins improved from -116% in 2011 to -6.6% in 2016, before reaching positive territory this year. The international contribution margin was about 3% in the nine months ending September 30th, 2017. The company spent nearly $1 billion on marketing this year to expand its services in international markets, but improved scale and margins have helped the company to report an uptick in cash flows from international operations despite the increase in content and marketing costs.

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