It was a great year for Netflix Inc. (NFLX, Financial) in 2016 because the stock was up approximately 10%. Despite facing increasing competition, downside of original content, reliance on media companies and several other obstacles, the company managed to remain in the green. Moreover, the company is off to a great start this year as well.
Netflix recently reported strong fourth-quarter results. The company shared EPS of 15 cents, beating analyst estimates by a cent. On the other hand, the company’s revenue came in at $2.47 billion, in line with the consensus estimates. That figure represents a whopping surge of 35.7% year over year however.
The primary factor behind the company’s robust results was its subscriber growth. The last two quarters of the previous year reveal a completely different story compared to the first and second quarter.Â
In the most recent quarter, the company added approximately 5.1 million net new international subscribers, beating its own guidance of 3.2 million by a wide margin. In the case of the domestic segment, the company added 1.9 million new subscribers, up 0.4 million from its guidance of 1.5 million. These numbers clearly suggest that regardless of a loftier base, subscriber growth is hastening, even in allegedly saturated markets like the U.S.Â
The most significant growth driver is original content however. Due to increasing competition, the company transitioned to producing original content to gain a strong lead over other streaming services. As evidenced by its fourth quarter results, the company’s strategy has already started paying off.
Most significantly, the company also decided to release over 1,000 hours of original programming this year, representing a surge of 400 hours compared to 2016. Producing an abundance of original content is a step in the right direction because it will help Netflix attract more subscribers and retain existing subscribers. This focus will also give the company more flexibility in regard to price hikes.
Summing up
After finishing 2016 in the green, the company still has a lot of upside potential.The company’s fundamental growth story is reinforced with original content, margin expansion and international headway.
On the other hand, the company’s subscriber growth rate is directly proportional to its production of original content. As a result, the company’s success is just getting started and there is a lot more to come this year. Investors should not sell the recent rally and continue to hold the stock for long-term gains.
Disclosure: No position in the stocks mentioned in this article.
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