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Netflix May Be a Game-Changer

March 24, 2014 | About:

Netflix Inc. (NASDAQ:NFLX) is an Internet television network with more than 33 million members in over 40 countries. In the United States, the Company’s subscribers can receive standard definition digital versatile disc (DVDs), and their high definition successor, Blu-ray discs (collectively DVD), delivered quickly to their homes. The company operates in three segments: Domestic Streaming, International Streaming and Domestic DVD. Domestic and International streaming segments derive revenues from monthly subscription services consisting solely of streaming content.

Tracking the Performance

The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and expanding profit margins.

The revenue growth came in higher than the industry average of 8.5%. Since the same quarter one year prior, revenues rose by 24.3%. Growth in the company's revenue appears to have helped boost the earnings per share.

Powered by its strong earnings growth of 507.69% and other important driving factors, this stock has surged by 132.44% over the past year, outperforming the rise in the S&P 500 Index during the same period. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.

It reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, the company increased its bottom line by earning $1.85 versus $0.29 in the prior year. This year, the market expects an improvement in earnings ($4.09 versus $1.85).

The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet & Catalog Retail industry. The net income increased by 513.1% when compared to the same quarter one year prior, rising from $7.90 million to $48.42 million. The gross profit margin for Netflix is currently very high, coming in at 82.25%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 4.12% is above that of the industry average.

The Netflix-Comcast Deal

The peering deal struck by Netflix and Comcast (NASDAQ:CMCSA) could well prove to be a game-changer for large cable operators, telcos, and other large broadband providers in their dealings with OTT video providers. Comcastand Netflix confirmed that they have signed a new interconnection agreement to improve the quality of Netflix streams for Comcast subscribers and allow for the continued growth of Netflix traffic.

The new peering agreement does not mean that Comcast will put Netflix's caching appliance in its last-mile network the way some other providers have. Several outlets are reporting that Comcast is not supporting the Netflix appliances, and Light Reading has confirmed with a source close to the deal that this is indeed the case.

In exchange for payment, Netflix will get direct access to Comcast's broadband network. Terms of the deal have not been disclosed, although Comcast is saying that Netflix will not receive any preferential network treatment.

A Look into the European Expansion

The streaming service will expand its footprint on the continent this year, as CEO Reed Hastings indicated in January. These next destinations for Netflix will differ from its first wave of European markets — the UK, the Netherlands and Scandinavia — in one key regard: Incumbent pay-TV providers and pure-play streaming services from Russia to Spain have been anticipating the entry of the U.S. juggernaut, and have had ample time to counter with broadband-delivered VOD plays of their own. Nevertheless, a complex web of factors will make Netflix’s border crossing either breezy or brutal, depending on which nation is stamping its passport.

Now that Netflix is ready to regain its momentum in Europe, the only question is where. There have been plenty of rumblings about the larger markets like France and Germany but no clear indication of what’s next. But Morgan Stanley is bullish on Netflix’s European growth prospects, projecting it will add 30 million international subs from 2014 to 2018.

More Opportunities on Its Way

Netflix's management has stated that the company's U.S. opportunity stands at 60 million to 90 million. Based on the lower end of that guidance, Netflix will be able to rope in another 30 million new domestic users. Netflix how has more U.S. subscribers than Time Warner’s (NYSE:TWX) HBO. Netflix offers a much better user interface and more content compared to its competitors, which should keep its domestic subscriber base growing, and its churn rate should drop to a record low. Netflix is extracting incremental revenue from a small group of consumers through tiered pricing plans, like family pricing at $11.99 for four simultaneous streams.

Management stated it will increase its original content budget from 10% of its total content expenditures to much higher levels, to the tune of 15% to 20% in 2014. Netflix is spending close to $3 billion a year for content, and if the company allocates 20% of that toward developing high-quality originals, it will have a much more robust original library. The development of more Emmy-winning shows will attract newer audiences to Netflix, and give the company more pricing power.

To End

Online video giant Netflix is sitting pretty with more than 40 million subscribers. Netflix stock was the second-best performer in the U.S. market in 2013, with shares up almost 300%. But based on the booming growth in subscribers in the domestic and international markets, and its growing portfolio of original and exclusive content, Netflix still has solid upside in 2014.

Netflix can easily grow its penetration rates in the U.S., and gain a lot of new members in its international segment. The company's management team has done a fantastic job of widening its moat and executing on its long-term vision. Netflix has a number of years of double-digit revenue growth ahead, and will receive substantial tailwind from secular consumer trends. Taking all these factors into account, Netflix seems headed higher in 2014.

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