Netflix, Inc. (NASDAQ:NFLX) needs a market the size of China’s to continue growing. It expects to have over half its revenues coming from outside the U.S. in two years, but without a China-sized opportunity, the market may not credit that as growth it wants to buy.
Most U.S. tech companies long ago resigned themselves to taking tiny bites out of the China market. Despite extensive free-trade agreements, the Chinese government has used its strict censorship regime to create impenetrable non-tariff restrictions on such U.S. online services as Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), Twitter Inc (NYSE:TWTR) and Facebook Inc (NASDAQ:FB).
Netflix needs to tell a China story now, because over the last year it has been effectively de-FANGed. It is no longer a peer holding for technology investors, like Facebook — up 49% in the last year — Amazon (up 62%) and Google (up 29%) are.
While it did make a good jump today on an upgrade from William Blair, shares in NFLX stock — the “N” in the FANG acronym — are actually down 5% over the last year.
NFLX Has New Peers in Entertainment
Its new peers are entertainment distributors and owners, like Time Warner Inc (NYSE:TWX), Twenty-First Century Fox Inc (NASDAQ:FOXA) and Comcast Corporation (NASDAQ:CMCSA). Even here it is no leader — Comcast is up over 20% over the last year, and Time Warner over 15%. (Fox is down 7%.)
The point is that Netflix buys or licenses entertainment products and then delivers them over its own network. The difference is that Netflix uses the internet, while Comcast is primarily a cable operator and Time Warner and Fox cable broadcasters.
All of these companies, however, own entertainment studios — Universal in the case of Comcast, Fox in the case of Fox, Warner Brothers in the case of Time Warner.
It is a unique achievement for NFLX stock, founded in 1997, to be mentioned as a peer alongside these 20th-century giants. The old-line movie studios are all nearly a century old. But Netflix’ market cap of $41.2 billion stacks up well against Fox’ $46.3 billion and Time Warner’s $62 billion.
HBO, a unit of Time Warner, may be the company most comparable to Netflix. At the start of 2015 it was said to be worth $20 billion, based on revenues of $5.4 billion. (Netflix had nearly $6.8 billion of revenue last year.) It is Netflix’s growth rate of nearly 25%, against just 3% for HBO, that helps account for the huge valuation difference.
But that brings us back to where Netflix might get growth from, and whether it can crack the China puzzle.
China Has Its Own Netflix
Just as with social networking and search, China has nurtured its own version of Netflix, called LeEco, said to be worth $14 billion. China restricts online services by demanding absolute censorship and anything else Netflix may own is subject to piracy.
Still, NFLX stock continues to express interest in the China market and it’s expected to announce a content strategy for the market later this year.
As with the U.S. market, Netflix is depending on exclusive content, like a new Star Trek series, which will stream early next year along with the franchise’s past shows, to break into the market.
How Long Can NFLX Stock Wait?
It is not imperative that Netflix stock enter China immediately in order to keep growing, because it’s in over 190 countries now, but its growth is slowing. The June quarter’s revenue of $2.105 billion was 28% ahead of last June’s $1.645 billion.
Right now Netflix has 46 million customers in the U.S. and 33.9 million elsewhere around the globe. It is customizing its offerings, translating some movies into local English, and creating specific content for other markets, in order to keep growing.
By 2018, it hopes to be an irresistible force to the Chinese government, one that has demonstrated a willingness and ability to do business on any terms China may demand. But by that year, too, it will be pressing up against the limits of what its present global platform, and other international growth, can manage.
So long as China says no to Netflix, its stock will have a growth ceiling.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, GOOGL and CMCSA.
