- Netflix shares are currently trading at an all-time high.
- A lot of the gains made by the shares this year have been in relation to the company's impressive international expansion.
- When is Netflix's fairy tale run likely to come to an end?
Shares of leading video streaming company Netflix (NASDAQ:NFLX) recently crossed the psychological $130 mark and are currently trading at an all-time high. Netflix stock has been on a dizzying run this year, and the shares now sport an incredible YTD return of 168.3%.
Netflix Stock YTD Returns
There are a couple of reasons that have been advanced to explain the extraordinary run of Netflix stock. One of these is that the company’s simple selling model that never gets tied down to retail overhangs has proven to be attractive to investors. In essence all that investors have to do to get an idea of the health of Netflix’s business is to look at its subscriber growth without having to worry about stuff like rate of inventory turnover and so on. Faster subscriber growth for Netflix equals faster growth and vice-versa, period. It’s a pretty compelling argument, only that Netflix’s selling model is well known to the average investor so that was perhaps fully baked into the shares a long time ago.
A second and more valid reason advanced is that streaming services such as Netflix have now become just as popular as traditional cable, and are set to become the de facto way to watch your favorite channels in maybe a few years. New data underscores the growing sentiment that younger folks are completely bypassing traditional TV and signing up for video streaming services such as Netflix and Hulu. For older folks with a cable TV subscription, the decision to cut the cord is frequently nerve-wracking. But younger demographics with no fond memories of cable have no qualms signing up for streaming video.
International expansion driving Netflix stock price gains
But a frequently overlooked reason why Netflix has done so well in 2015 can be summed up in one phrase: international expansion. During its first year as a public company, Netflix expanded incredibly fast in its US home turf. But it soon became apparent that the company could not maintain that kind of astounding growth by relying on its domestic market alone. Netflix started focusing more on international expansion, and this has been paying off in spades.
During the last quarter, Netflix added just 0.88 million domestic subscribers, but 2.74 million international subscribers, more than 3x as many. Netflix finished the quarter with 43.2 million subscribers and 25.99 million international subscribers. The average large Internet company in the U.S. receives 70% of its revenue from international markets, implying Netflix has a long way to go before it can attain that profile.
There is a good reason why investors are excited about Netflix’s international expansion. In many of these markets, Netflix faces little competition, which has been helping the company to expand fast. Amazon Prime Video and Hulu might be formidable competitors for Netflix in the US, and are probably one of the reasons why Netflix growth in the US has slowed considerably. But these two are much weaker in international markets which gives Netflix room to expand with minimal limitations. A good case in point is Netflix’s launch in Australia. It’s been 8 months since Netflix launched in Australia. Yet the company has managed to sign up close to 3 million subscribers in that short space of time, and now owns 80% of the Australian video streaming market.
One of the reasons Netflix has been enjoying strong growth in international markets is its original content and strong programming. Additionally, a lot of the countries that Netflix is moving into are English-speaking nations. This makes it relatively easy for the company to scale up its distribution using its current content library.
When will Netflix stock price hit a speed bump?
But this does not mean that Netflix is bereft of challenges. The company is facing various content challenges. For instance, the company is currently going through a dry period with no original content since its original content deal with Epix ended in September. Since original content is one of the key draws for Netflix, there is a fair chance that Netflix’s subscriber growth during the seasonally hot fourth quarter may not meet expectations, which could hit the shares.
Netflix also continues to face ever-growing content costs, which has been pressuring its thin margins. In just three years, the content costs as a percentage of revenue have risen from 80% to 89%. And this situation might not improve any time soon since cable companies, which have traditionally been the most important content suppliers to Netflix, have been increasingly souring on the company and preferring to license content to Hulu, a company co-owned by three of the six largest media companies.
Ultimately in the short-term there really is nothing to stop Netflix stock price, as long as the company can keep growing its subscriber base at a healthy clip. The biggest speed bump the shares are likely to face will be during the company’s fourth quarter earnings call early next year if subscriber growth fails to impress. But even then, it’s likely to be a temporary setback since Netflix will soon make an entry into China, by far the international market with the highest growth potential for the company.