- Netflix stock has surged after the company announced that its international expansion plans are well ahead of schedule.
- Netflix shows can now be viewed in more than 190 countries around the world.
- But even better is the news that Netflix will become solidly profitable in 2017.
The first two trading sessions of the year were very choppy with most tech companies counting heavy losses. Netflix stock was not spared either, losing more than 6% of its value. Netflix shares, however, more than fully recovered on the third day of trading after the company revealed that its international expansion plans were well ahead of schedule. Netflix shares jumped more than 12% after the CEO Reed Hastings announced at this year's Consumer Electronics Show, or CES, that its services are now available in more than 130 new countries around the world, which implies that the video streaming service now has a presence in every market in the world with the exception of China. Netflix (NASDAQ:NFLX) shows can now be watched in more than 190 countries around the world. During the company’s last earnings call in October, Netflix’s management told investors that it planned to complete its international roll-out by the end of 2016. The latest revelation implies the company could achieve its target well ahead of schedule.
The good part about Netflix’s international expansion is that analyst checks have revealed that most of the company’s original shows, which act as the main draw for the service, are available in most countries. All that is left in order for Netflix to compete on an even keel with local streaming services is to deepen its library of local content to make it more relevant to the local audience.
Real Profitability Ahead For Netflix
But perhaps the most exciting part of Netflix’s international expansion efforts is that they will help the company to become materially profitable as early as 2017. Netflix usually breaks down its revenue and profit contributions for its domestic and international segments. During the last quarter, the company’s domestic market (43.2 million subscribers) brought in $1,024 million in revenue and $340 million in gross profit. The international segment (25.99 million subscribers) brought in revenue of $517 million and gross profit of -$92 million.
Netflix’s international segment is therefore not yet profitable, due to the considerable infrastructure spends Netflix has to make there. Nevertheless, Netflix’s cap-ex is still much lower compared to what media companies such as traditional telecoms typically spend when expanding their networks. Netflix spends about 6% of its revenue on infrastructure cap-ex, with content costs gobbling up close to 90% of its revenue. That’s why the company is able to expand at a clip that most media companies can only dream of.
Netflix recently painted a long-term view of where the company is heading to. Netflix plans to spend a hefty $7B on content marketing and development costs in 2016. Content costs alone will cost $5B, or about double what the company spent in 2015. This underlines not only the kind of investments Netflix has to spend to grow, but also the growing costs of original content as competition from rivals such as Amazon Prime Video and Hulu intensifies. Meanwhile, the company’s marketing costs are projected to reach $1B, up 70% compared to the previous year.
These enormous costs are largely a result of Netflix’s huge international growth spurt, and will keep Netflix’s profit margins thin. Netflix has for a long time operated on razor thin margins, and 2016 will be no exception. Netflix projects that it will only manage to break even in 2016 as the company continues expanding into new markets such as South Korea, Russia, Nigeria, Turkey, Vietnam, and Poland.
The turning point, however, will come in 2017 as the company starts to consolidate on its new markets. Netflix projects that its global business will become solidly profitable in 2017 and beyond. This implies that the company will likely be through with its expansion, and will be busy adding subscribers. This should give long-term Netflix investors some reassurance since some had begun losing hope regarding whether the company’s international expansion will improve its bottom line. A good part of what Netflix will be providing in international markets will be from its original content library which will be shared across diverse markets. That should help lower overall content costs and improve the company’s profitability as more subscribers sign up thus allowing Netflix to enjoy economies of scale. All in all, things look very good for Netflix stock in the long run.