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Netflix (NASDAQ:NFLX) is benefiting from its focus on creating original programming and international expansion. The increasing strength in the content portfolio will continue to help gain more subscribers. Netflix (NASDAQ:NFLX) expects to add 0.75 million subscribers in the US and 3.65 million in internationally in the third quarter. Efforts to attract viewers through investing in more regional programming should also boost user base. In the 12 months, Netflix (NASDAQ:NFLX) shares have vastly outperformed the industry. Nonetheless, investments in both original and acquired content remain a persistent pressure on profitability.




Price targets for the stock remain impressive with 38 analysts offering 12 month price forecasts have a median target of 199.50, with a high estimate of 230.00 and a low estimate of 82.00. The median estimate represents a 10.40% increase from the last price of 180.70.

Overview

Founded in 1997 and headquartered in Los Gatos, CA, Netflix Inc. (NASDAQ:NFLX) is a provider of Internet television (streaming services). It streams movies and television shows to both in the US and to international subscribers who can watch them on most devices, including television sets, computers and mobile phones.

The company reports its revenues under three separate segments—Domestic Streaming, International Streaming and Domestic DVD. The Domestic and International Streaming segments generate revenues from monthly subscriptions on exclusive, non-exclusive and original content in the U.S. and international markets (present in about 190 countries.

In 2016, Netflix earned $8.830 billion in revenues. Domestic streaming revenues came in at $5.077 billion (or 57.5% of total revenue). Revenues from International streaming came in at $3.211 billion (36.4%) whereas revenues from DVD segment came in at $0.542 billion.




The company primarily derives its domestic streaming revenues through a $9.99 per month membership plan for two screens. So far, early Netflix members paid $8.99 for this plan. However, the company has declared that it will gradually remove this “grandfathering “to make subscription charges uniform for all domestic users. Members also have the option to choose between a $7.99 one screen plan or $11.99 four screen plan.

Netflix’s International streaming revenues are derived from monthly membership plans that range from $8.00 to $14.00.

In the domestic market, the company faces competition from Google Inc., Amazon.com Inc. and Apple Inc. in the movie streaming business. Additionally, Netflix competes with Movie Gallery Inc. and Red Box—the kiosk company owned by Coinstar Inc.—in the DVD rental business.

Recent Earnings

Netflix (NASDAQ:NFLZ) Q2 Earnings Miss but Confirms Strong Subscriber Growth

Netflix reported Q2 2017 earnings of $0.15 per share, which missed the Zacks Consensus Estimate of $0.16. Revenues of $2.786 billion beat the consensus estimate of $2.761 billion. Earnings grew 66.7% while revenues increased 32.3% on a year-over-year basis. Moreover, the company added over 5.2 million subscribers, much more than the expected 3.2 million.

Netflix’s (NASDAQ:NFLX) focus on international expansion and original regional content has paid off, with 4.14 million net new additions overseas in the quarter. The company remains confident of adding more and more subscribers as the trend of binge viewing catches up fast. Netflix now has 104 million subscribers globally.

 

Reasons To Buy:

A look at Netflix’s past year price performance shows that although the company has witnessed ups and downs over the course of the year, it has outperformed the Zacks categorized Broadcast radio/TV industry overall. This is due to the company’s positive record of earnings surprises in recent quarters. Shares are up 93.6% compared with industry’s gain of 33.1%. Looking at Netflix’s strong history of year-over-year revenue and earnings growth, we believe that its strategic initiatives such as International expansion and focus on original content should help sustain the momentum ahead.

Netflix’s growing subscriber base is the primary factor that helps it generate significant revenues. In the last reported quarter, Netflix recorded 5.2 million net new additions, way ahead than management’s guidance of 3.2 million. Netflix attributed this as result of the strength of its content. The company remains confident of adding more and more subscribers as the trend of Internet TV/binge viewing catches up fast. Going ahead, the company expects to add 0.75 million subscribers in the domestic streaming segment and 3.65 million subscribers in the international segment in the third quarter. The company’s efforts to attract viewers through investing in more regional programming should also boost user base.




Rapid international expansion has paid off for Netflix, with the company adding 4.14 million net new subscribers overseas in the quarter, much ahead of the expected 2.6 million. International Streaming revenues (41.8% of total revenue) soared 53.7% year over year to $1.165 billion driven by an increase in paid members. Netflix now has 52 million subscribers internationally. Going ahead, the company expects to add another 3.65 million international subscribers in the third quarter. Last year, the company rolled out its service simultaneously in 130 countries— including India, Azerbaijan, Vietnam, Nigeria, Poland, Russia, Saudi Arabia, Singapore, South Korea, Turkey and Indonesia—taking the total presence to 190. To attract subscribers, Netflix will offer free service in the first month. Also, Netflix plans to add more regional languages to make the service more appealing. As of now, it offers content in over 24 languages. The aggressive expansion is impressive and has been well reflected in recent earnings numbers. The company, however, is striving hard to break the China Wall, given the sheer demographic strength of the country. Unfortunately, stringent regulations have proved an impediment so far.

Netflix’s (NASDAQ:NFLX) international expansion and focus on original content will continue to boost subscriber growth.

Reasons To Sell:

Netflix (NASDAQ:NFLX) primarily faces competition from bellwethers like Amazon Prime Instant Video, Hulu and Time Warner’s HBO, which also offer online streaming services. Given the scope for growth in the market, all the players are ramping up their efforts to boost their subscriber base. Amazon is also undertaking many initiatives to enhance its content portfolio and even venturing into original programming, which might pose some challenges for Netflix. It recently ventured into live streaming sports with NFL deal. Moreover, Amazon has recently launched a video-only subscription plan in addition to its complete Prime service on a monthly payment basis. Hulu, on the other hand, has partnered with the likes of Sony Pictures to broaden its content offerings. In addition, it is also offering more pocket-friendly plans (though not ad-free) for users. HBO, which held the crown of for original content developing, is now also focusing on expansion. Competition is heating up further with players like Facebook, Snapchat and Twitter also making efforts to improve video viewing on their platforms. Facebook has struck partnerships with lots of celebrities and media houses to churn original live content for its platform, further increasing competition.




International expansion and content additions resulted in cost escalations in the form of technology investments and marketing expenses. However, the recent expansions will further dent the company’s profitability in the near term. In 2017, the company

Expansion and content additions resulted in cost escalations, which along with stiff competition can thwart growth prospects.

 

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