Is Netflix's Growth Story Over?

Although expense is rising, Netflix can outperform the market thanks to strong growth

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Feb 24, 2016
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Shares of momentum stocks have pulled back considerably in 2016, and Netflix (NFLX, Financial) is no exception.

Opportunistic investors can use the recent correction as a buying opportunity and can load up on many growth stocks on the pullback. Netflix is down over 22% year to date, but given the company’s expansion prospects, it will soon reverse its downtrend and move higher. Therefore, investors should consider buying Netflix.

Domestic margin growth

During the time between 2012 and 2014, Netflix tried to boost its domestic streaming margin by around 100 basis points for each quarter, or 400 basis points yearly. Throughout 2012, the company’s contribution margin surged approximately twice as much compared to this target rate. The company’s domestic contribution margin growth also surpassed the mark in 2013 and 2014, though by a lesser amount.

During 2014, the company’s management said this quick margin expansion was not sustainable. Later that year, Netflix reported that, after achieving the 30% mark in early 2015, domestic contribution margins would surge by 200 basis points yearly, touching the 40% mark in 2020.

The anticipated slowdown in margin growth has not appeared so far. In the most recent quarter, the company’s domestic contribution margin touched a record 34.3%, up 630 basis points year over year. For the approaching quarter Q1FY16, the company expects to generate a 35.9% domestic contribution margin, which would be up by 420 basis points year over year.

The company’s guidance indicates that margin expansion will diminish quickly after this quarter. However, the current trajectory of robust margin growth does not appear to be reliable with this expectation.

More capital

In spite of having over $1.8 billion of cash on its balance sheet, the company’s management has reported that it is likely to hit the capital markets in the approaching year or 18 months. As the company hikes worldwide growth and content production, it will spend a lot of cash on running the business by buying new content. In 2015, cash burn was around $920 million, and it is not likely to slow down this year. On the other hand, as per the company’s management, this cash burn signifies investments that will pay off in the long term.

Netflix is a reputable company mainly due to its amazing services and products. Keeping in mind the strong suit of its product, raising capital should not be problematic for the company. The company has adequate capital and ambitious investors will be willing to raise cash for it.

It is not a major concern whether the company can successfully raise capital or not. The most significant thing is the technique that the company selects to raise capital because it can give signs to the market, chiefly about what management thinks of its stock valuation.

Conclusion

With Netflix just starting to expand internationally, investors can expect expenses to skyrocket in the coming months. However, these investments will pay off in the long run, and it will improve Netflix’s content and lure more customers. Netflix’s growth story is still intact, and investors should consider buying the stock.