After going through a horrible period of not being able to match its own expectations – when second quarter numbers came in well below the target the company had set for itself – Netflix (NFLX, Financial) came out with roaring third quarter numbers, beating analyst estimates fair and square.
Wall Street was expecting the company to report 6 cents per share with revenues of $2.28 billion, but the company reported earnings of 7 cents per share with revenues of $2.29 billion.
The most interesting part of the report was the better-than-targeted growth in the subscriber base. During the second quarter call, the company anticipated a third quarter total membership base of 85.48 million, with 47.43 coming from the U.S. and the remaining 38.05 million coming from international markets. But Netflix went over by 1.26 million with the U.S. total user base coming in at 47.50 million and 39.25 million from international markets.
That the company was able to do slightly better in the slowly overcrowding U.S. market was good news in itself, but the growth in international markets was definitely a shot in the arm, which sent the stock soaring over 20% after the results came out.
Netflix’s user base in the U.S. is increasingly threatened by the growth of Amazon’s (AMZN, Financial) and Apple’s (AAPL, Financial) ambitions in the video streaming market, not to forget YouTube Red and the rest of the field. The U.S. is a lucrative market, but the potential user base is limited, and with more and more players entering the fray Netflix’s user base growth will slow. However, as the market leader with strong original programming expertise, Netflix should be able to hold its ground and show stable growth for the next few years.
That leaves international markets as the only option for significant subscriber additions to the Netflix global family. The company has expanded its reach to more than 190 countries and, while it would be wrong to expect it to grow in all those markets, Netflix should and will be able to grow in select countries.
The company has already doubled down on its original programming expenses. The dwindling library of licensed content and increasing debt profile of the company – Netflix announced that it will be raising debt to help fund its content ambitions – is a clear indication that the company wants to do everything it can to stand out from the crowd.
“Netflix Inc. is increasing a bond offering to $1 billion from $800 million as investors hanker for a piece of the deal that will help fund the streaming company’s content expansion, according to a person familiar with the matter.” – Bloomberg
Netflix is a hypergrowth stock and an extremely risky one for anyone but long-term investors. When net adds slowed down during the second quarter the stock was hammered after the results, and when net adds increased by more than the expected number the stock soared by more than 20%. It will continue to remain volatile, moving up and down depending on how many people decide to sign up during the quarter. If you want to buy the company, buy slow and buy small, and do it over a really long period of time, thereby allowing dollar cost averaging to work in your favor.
Disclosure: I have no positions in the stockz mentioned above and no intention to initiate a position in the next 72 hours.
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