Netflix (NFLX, Financial) is one of my favorite companies, not because it keeps increasing its sales year after year, but because the company has proved time and again that it is extremely adaptable to changing circumstances. Companies that are not able to evolve in sync with market conditions always find their going difficult, and things are even more difficult if you are operating in an ultracompetitive landscape.
Netflix started off selling DVDs and renting them out via a mail service. It then slowly moved toward video streaming, initially concentrating on the U.S. market. As its numbers grew in the U.S. and penetration levels kept moving higher and higher, Netflix made a massive move to international markets, rolling out its service to 190 countries.
As more and more deep-pocketed tech companies moved into the SVOD (streaming video on demand) market, Netflix decided it was time to concentrate on original programming and increased its budget in the order of billions, thereby making its product stand out from the crowd.
Amazon (AMZN, Financial) and Google have their own video streaming products, but despite the cash on their balance sheets, their products are many years from matching Netflix. For Amazon and Google, video on demand is just one of their products, but for Netflix that’s all it does. As a niche player, Netflix can stay focused and keep investing every dollar it can spare to keep improving its service and growing its original content portfolio.
Netflix may take many more years to have a solid offering in international markets, but by moving into most of the major economies, Netflix has already signaled that it will try and do what Amazon (retail) tried in international markets: take your time, establish your credentials and slowly build out your service year after year. Netflix has tasted success in the U.S. and will be looking to repeat that success overseas.
Netflix had $1.4 billion in revenues from a total membership base of 49.43 million in the U.S. during the fourth quarter while the international segment had 44.37 million users bringing in revenues of $948 million. Netflix’s international revenues have nearly doubled from $566 million in fourth-quarter 2015. It is extremely likely that international revenues will overtake U.S. revenues next year, providing a solid offset to its dependence on a single market.
The runway in international markets is so huge that it will be difficult to predict how many users Netflix will have five years from now. This is one of the reasons why the stock keeps trading at high valuation multiples, making the stock extremely sensitive to news. The stock swings wildly after every earnings call and will continue to do so as long valuation remains over the top. It's a great company, but if you want to invest in Netflix, buy only during the dips or buy small amounts over a long period of time.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
