The Netflix growth story has been remarkable; the stock has exploded higher in the past several years and has returned 643% to investors over the past five years.
Its tremendous share price performance has had its share of doubters over the years. Critics contend the pace of customer growth in the U.S. will soon slow down. But Netflix has proven time and again to continue to find ways to grow.
Netflix has countered fears of slowing growth with gains from original content, as well as customer growth in the international markets. These catalysts should fuel continued growth moving forward.
Netflix Growth: Fast-Forward on New Subscribers
Last quarter, Netflix added 370,000 new customers in the U.S., beating consensus analyst estimates by 66,000. Even Netflix itself was only guiding to 300,000. This was an impressive total; last quarter’s customer addition was more than double the pace from the previous quarter.
The company continues to benefit from “cord-cutting,” which refers to the structural shift by consumers, away from pricey cable bundles toward cheaper streaming options. Netflix has disrupted the cable companies by offering a popular service for a much lower price than cable television.
And, Netflix has boosted its appeal in recent years by investing in original content. This investment has paid off, with hit original shows like “House of Cards” and “Orange is the New Black.” Last quarter, Netflix said its top-performing shows were “Stranger Things” and the second season of “Narcos.”
Producing original content is expensive, but Netflix is making the right decision to do so. That is because, with heightened competition from the likes of Hulu and many others, streaming is suddenly a crowded space. A strong lineup of original content helps Netflix differentiate itself from the competition and provides a value proposition to consumers choosing between the many streaming options.
Overall streaming revenue clocked in at more than $2 billion last quarter, the first time Netflix has reached that mark in any quarter. Revenue grew 36% last quarter, year over year.
Up Next: International Expansion
The other factor helping Netflix is its international growth. New international subscribers came in at 3.2 million last quarter, well above the 2 million expected.
Not only is Netflix growing subscribers at a rapid pace, it is also growing profits thanks to margin expansion. Total streaming contribution margin rose by 120 basis points just from the previous quarter. As Netflix accumulates more customers, it is able to drive costs down. It is also working on this in the international markets. Netflix is not yet profitable outside the U.S., but its losses are narrowing.
Going forward, investors should expect Netflix’s aggressive streak of growth to continue. For the fourth quarter, the company expects to add another 5.2 million subscribers, 3.75 million of which will be outside the U.S.
Netflix is also planning to partner with existing online service providers in China, rather than try to establish itself there, which has been increasingly difficult. Still, any presence in China — an emerging market with a population of 1 billion and an expanding consumer class — is better than none at all.
Netflix Growth Ahead
Over the long-term, Netflix should be able to continue driving significant revenue growth and margin expansion. A part of this will likely be through price increases. Netflix management indicated on the earnings call that it has no plans for another price increase.
With more competition in the streaming space, Netflix is being careful not to upset its customers. Investors may recall the company took a fair amount of heat for its decision to increase its monthly subscription price to $9.99.
But while another price hike is not likely in the near-term, it remains an important part of the Netflix growth strategy. Even at $9.99, Netflix is still a highly attractive option for consumers, relative to average prices for cable television packages. Netflix should be able to continue benefiting from the cord-cutting trend in the U.S., which still has room to run.
For the fourth quarter, Netflix is expected to grow streaming revenue by 40%. This would mark an acceleration from the third quarter. As long as Netflix growth continues at such high rates, investors have little reason to sell the stock.