Say what you want about Netflix (NFLX, Financial), but it isn’t just a company. Over the course of the last decade, the streaming service has completely altered our media consumption habits. Netflix has chased countless industry titans into bankruptcy, expanded its reach across the globe and become a cultural phenomenon in its own right.
That’s why people will inevitably start to panic when they hear the site isn’t exactly raking in the numbers. Do yourself a favor and keep calm. Netflix is just fine.
On Monday, the company posted a set of mixed first-quarter results that threw a lot of investors. The short-term impact has been catastrophic. Shares fell by almost 3% during trading and another 8% after hours. That means literally billions of dollars have been wiped off Netflix’s market capitalization overnight.
But is this mass exodus warranted? Absolutely not.
Let’s break down the company’s first-quarter results. First and foremost, revenues are up across the board. Netflix has raked in $1.8 billion worldwide, and the lion’s share of that income is still domestic. U.S. revenue shot up 18% year over year last quarter, bringing in a profit of $413 million. For reference, that represents a profit margin of just over 35%.
That sounds fantastic. But when we look further afield, the narrative gets a little bit muddled.
International revenue grew by an incredible 57% in the first quarter. Netflix has expanded to some 130 countries across the globe, and numbers are up in just about all of them. Unfortunately, that rapid growth has come at a cost. The company hasn’t really tried to hedge against potential currency woes, which has cost them a cool $82 million.
As a result, Netflix’s international business actually posted a sizeable loss of $104 million for the quarter. To be fair, that loss was less than expected. It was also a slight improvement on the final quarter of 2015 – but that doesn’t make it sting any less. Moreover, it's not even what's got Wall Street so spooked.
At the end of the day, it’s impossible to sugarcoat the fact that subscriber growth is not coming in nearly as fast as everybody thought it would. In 2015, Netflix’s international subscriber growth rate came in at least 14% ahead of forecasts every single quarter. That's pretty much the sole reason investors got so excited about Netflix in 2015. But fast-forward to the second quarter of 2016, and the company is now expecting to cut its international user growth rate by almost one-fifth.
That’s totally scared investors – hence Monday’s selloff. Yet the devil is really in the details here. The only reason Netflix posted such colossal user growth in 2015 was because of its huge market launches in Australia and New Zealand. That spike more than doubled the company’s annual growth rate in the second quarter of last year. But three quarters later, things have now mellowed out, and it's finally business as usual.
Why on earth should that be a reason to sell? If anything, investors should be jumping for joy. After all, without a one-off spike in growth, analysts should finally be able to accurately chart Netflix’s long-term sustainability, and the company is totally sustainable.
Over the past year, Netflix has been investing heavily in expanding its global empire. That takes time and a whole lot of money. Yet so long as the company’s international subscriber base continues to grow at a modest rate, profit is imminent. After all, Netflix's top competitors still can’t put a dent in its margins, and shrewd overseas expansions are about to start paying off big time.
In fact, if you've got your eye on the long term, now is probably the perfect time to invest. Netflix is definitely going to bounce back with a vengeance. But jumpy investors have to bear in mind that it will take a few more quarters and a lot of hard work before things get moving properly. In the meantime, we're just going to have to sit tight and be patient.
