Netflix (NFLX, Financial) is one of the most well-known brands of our time that totally disrupted the way we consumed our shows and movies. Their growth has been so furious in the last ten years that the stock is valued at 5.6 times sales, despite losing 10% of its value in the last twelve months.
The video streaming company’s subscription base has grown from 26 million in 2012 to 83.18 million at the end of second quarter of the current fiscal. So the company more than tripled its user base in a span of less than four years. The awesome growth in its user base helped the company move its top line from $3.2 billion in 2011 to $6.78 billion in 2015.
With a major portion of its revenue coming from the United States - $1.21 billion out of $1.96 billion in streaming revenues - Netflix is heavily dependent on its home country to keep its top line moving. The company did accelerate its efforts to expand internationally and is now available in 190 countries around the world, but things are just getting started and Netflix only had 36.05 million subscribers bringing in $758 million in revenues from their entire international segment.
The potential for growth in the international market is certainly there, but the top line is going to take time to flow, and Netflix needs lot of time to establish itself in those markets before it can see the kind of returns that it is getting from the States.
You can already see the disparity here. The U.S. market with 47.13 million subscribers brought in $1.208 billion in revenue, while International markets with 36.05 million subscribers brought in $758 million in revenue. Very soon, Netflix’s international markets will take over as the lead earner for the company, but revenue per subscriber will inevitably be higher in the U.S. segment.
But at home, competition in the video streaming segment has intensified with Amazon’s Prime Video, Alphabet’s YouTube Red and Apple Music stepping up their efforts to break into a market that was formerly the stomping ground for Hulu and Netflix. As a segment leader, it is Netflix’s market to lose. Fortunately, the company has established a brand that should help them hold onto their market share even if potential users are swayed by the competition.
The total number of broadband users in the United States is nearly 90 million, and the video streaming market is going to be a little lower than that number because families tend to take fewer connections, and not all broadband users will sign up for a streaming service.
When you look at it from the perspective of households, it’s clear that Netflix is approaching a level where subscriber growth cannot continue as it did before. The only thing Netflix can do at this point is look at different revenue streams such as the deal it recently struck to run some of its original shows at iPics Theaters in about 15 locations across the United States. This type of thinking is critical because it can create a stopgap measure to prop up their domestic revenues while international units are nurtured into profitability.
As such, Netflix has quite possibly reached the next, more mature stage of subscriber growth in the United States. From now on, it will have to play the leadership role and hold on to its user base while gradually adding to it. And it stands to reason that U.S. revenues will follow the same pattern. So far, Netflix has been doubling its revenues every two to three years, but moving forward, until international business catches up with domestic numbers, that’s going to be a tough act to follow.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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