Netflix, Inc. (NASDAQ:NFLX) took a small stumble in mid-April following its first-quarter earnings. The minor bout of bearishness in NFLX stock was mostly in response to a tempering in subscriber growth that came in slightly below analyst expectations.
However, shares have since recovered, and are actually up more than 6% despite Wednesday’s big down day for the broader markets that took Netflix and the rest of big tech with it.
Such a big downside move in share price over a hundred thousand subscribers (in the context of almost 100 million) seemed like a knee-jerk reaction, and it was. Shares have recovered and then some in light of the iQiyi deal that gets them a toehold into the vast Chinese OTT market.
Here’s why the direction NFLX stock observers should be concerned about is “up.”
What Netflix Earnings Told Us
Management is now urging analysts to turn their focus to the income statement — namely, revenue and operating margin growth. Notably, Netflix’s steady increase in revenue per paid membership demonstrates that the investments in high-quality content have supported price increases and implicitly conversion from trial to core.
Based on published numbers going back to the first quarter of last year, Netflix’s U.S. streaming business has improved 17.2% year-over-year, while international streaming has improved 14.1%. That’s despite an increasingly crowded over-the-top (OTT) space.
A new China deal — a partnership with Baidu Inc (ADR)’s (NASDAQ:BIDU) iQiyi video portal, which will show some Netflix content — helped push NFLX stock higher. That’s because Wall Street expects those international numbers to spike as a result.
International Dominance: Content Is King
Don’t overlook Netflix’s global reach and production value across its disparate markets.
Breaking out the subscriber data geographically shows that International Streaming is growing at a much faster clip than the domestic business, both in terms of revenue generated and paid memberships. This is natural given NFLX’s domestic roots and saturation, but with international taking up almost half of total subscribers now, this is where it has leverage over other OTT providers.
Netflix is already creating distributing high-production original content in countries including Brazil, Germany, Turkey, Japan, India and South Korea, among others. NFLX remains unrivaled in its push for television global scale; the rate at which its been bolstering and enhancing its library is tremendous.
Considering a sky-high 80-plus forward price-to-earnings ratio on NFLX stock, the question remains: How much of this growth is already priced in?
Amazon.com, Inc. (NASDAQ:AMZN) is the only competitor with the clout and brand awareness in the OTT space. Insofar as Netflix continues to push forward with localized (content produced for specific markets, versus content that plays well across multiple markets), high-quality content while keeping an eye on margins — which management has made a priority — it will continue to be a formidable player with a long runway ahead of it.
It’s worth mentioning that no other competitor — Hulu, Sling, no one — has anywhere close to Netflix’s scale internationally.
Amazon will naturally grow its international subscriber base, but even Prime membership has experienced deceleration in the past couple of years.
The Staying Power of NFLX Stock
Consumers will continue to value flexibility and selection in content. This is where Netflix’s robust production and distribution platform fortifies it from being considered an easily substitutable product.
In other words, if you want to watch House of Cards, you watch it on Netflix.
This, of course, is the longstanding bear argument. Costs of switching between OTT providers are low. If you want to cancel, you just quit your subscription with one and sign on with another. It’s just a matter of a few mouse clicks.
But between scale and more original programming, this argument holds less water. As Netflix continues to grow its portfolio of original content, studios in the linear programming business will have an increasingly difficult time competing for viewer time. OTT will continue to chip away at the hold on home entertainment that traditional studios have long had, and Netflix will be at the forefront of that shift.
With Netflix’s access and ability to aggregate data on consumer habits and preferences, it is able to tailor offerings and recommendations to increase viewer stickiness. This personalization component proves difficult to quantify, though retention could be a rough proxy. But it will give NFLX a huge advantage in tapping into customer engagement. This is powerful data that will help it continually refine its user experience and take viewing time away from competitors.
Customer satisfaction is ultimately the end game, and Netflix will continue to lead the OTT pack.
That’s why longs in NFLX stock can ignore blips like Wednesday’s quick drop.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
