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Netflix Knows no Limits

Posted on Wednesday, Apr 18th 2018

If anyone ever thought that Netflix (Nasdaq: NFLX) had no room to grow in the US, they are in for a surprise. Earlier this week, Netflix reported its first quarter results and it delivered stunning subscriber growth, even for the domestic market.

Netflix’s Financials

Netflix’s Q1 revenues grew 40% over the year to $3.7 billion, marginally ahead of the Street’s forecast of $3.69 billion for the quarter. EPS of $0.64 was better than the market’s projections of $0.63 for the quarter.

During the quarter, Netflix saw an impressive 25% growth in average paid streaming memberships year over year, and a 14% increase in its average selling price as it has completed its price adjustment for all grandfathered plans.

For the current quarter, Netflix expects to add 6.2 million subscribers with 1.45 million in the US and 4.9 million in other countries. It expects revenues of $3.93 billion, ahead of the market’s forecast of $3.89 billion for the quarter. EPS is expected to be $0.63. Analysts were forecasting revenues of $3.52 billion with an EPS of $0.57.

Netflix’s Subscriber Growth

The biggest news in the quarter was Netflix’s subscriber growth. It grew its subscriber base by 50%, adding 7.41 million new members. Earlier in the year, Netflix had forecast an addition of 6.35 million subscribers for the quarter. It added 1.96 million streaming subscribers in the US and 5.46 million in international markets. It had expected to add 1.45 million in the US and 4.9 million in international markets at the beginning of the quarter. Netflix ended the quarter by breaking the milestone of 125 million total members. The market is very pleased with the subscriber addition, with some analysts calling the growth “eye popping”.

The single driver behind Netflix’s subscriber growth has been its content. In the recent quarter, it was exclusive content of Altered Carbon, Marvel’s Jessica Jones, Queer Eye, Santa Clarita Diet, and its Spanish-language heist drama La Casa de Papel that helped attract subscribers. The company is still planning on spending anywhere from $7.5-$8 billion on content this year. During the year, Netflix expects to add nearly 700 original series and 80 original movies as part of this content line-up.

But content is coming at a high cost. Netflix continues to remain cash flow negative. For the trailing twelve months, Netflix’s free cash flow has come in at a negative $1.8 billion, and the company believes that despite the growth, it will remain cash flow negative for several more years. Netflix is counting on its ability to keep borrowing money to fund this deficit.

Netflix’s Rising Competition

Clearly, the market is pleased with Netflix’s market expansion. But competition in the industry is growing. Rivals Apple and Amazon continue to invest heavily in digital streaming content as well. Additionally, there are traditional media players that are pushing their digital offerings. Next year, Disney’s licensing terms with Netflix will end and it will stop supplying content to Netflix. Disney also owns 60% of Hulu and it is launching its own streaming service. But Netflix is not worried. It knows that despite these efforts, it will be quite a while before Disney is able to build a library as vast as Netflix’s. Similarly, Amazon and Apple may be increasing their content investments, but it will be a while before they can catch up with Netflix.

Netflix’s stock touched a high of $336.08 with a market capitalization of $145.8 billion. It had touched a life high of $333.98 in March this year. The stock has been rising from the 52-week low of $138.66 it was trading at in April last year.

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