The Netflix (NFLX) stock price has been absolutely pounded in the last month, cratering from highs near $130 per share to $95, a decline of more than 25%.
The steep overall market correction, driven largely by fears of slowing growth in China, caused Wall Street to take an introspective bent and look at its own high-flying stocks. Growth stocks with little or no profits — like NFLX — got hammered.
Then, a Variety article dropped another bomb: Apple (AAPL), it seems, is holding serious talks with bigwigs in Hollywood in an effort to begin producing its own entertainment content. With the new Apple TV expected to be unveiled today, Netflix could face a serious threat from Apple.
With NFLX stock plunging in an increasingly competitive environment, Netflix tried to calm the storm yesterday by reminding investors that, “Hey, our plans for international expansion are still on track, you guys!”
Can’t Deny the Potential in Asia
Yesterday, NFLX put out a press release saying that it will launch its video streaming service in four large Asian markets — South Korea, Singapore, Hong Kong and Taiwan — by early 2016.
It’s the second phase of the company’s Asian expansion plans. Earlier this month, Netflix finally launched in Japan, a market of 127.3 million. Understandably, NFLX stock is up more than 6% in early trading today, as investors lick their chops at the size of these new Asian markets.
Let’s take a look at precisely how large these markets are (numbers are from 2013):
- South Korea: 50.2 million people
- Singapore: 5.4 million people
- Hong Kong: 7.2 million
- Taiwan: 23.4 million
- Total market size (including Japan): 213.5 million
International expansion is where the growth lies for NFLX, which already boasts 41 million paid subscribers in the U.S. That’s 12.9% of the U.S. population. Consider the fact that friends and families often share Netflix accounts, and you can understand why the Los Gatos, Calif.-based company is looking overseas for growth.
So far, NFLX has been successful overseas. In the second quarter, while the number of U.S. paid subscribers increased 17% year-over-year to 41.1 million, international paid memberships soared 68% year-over-year to 21.7 million.
This is all great news for NFLX shareholders, who’ve seen the stock literally double in 2015 alone. But there’s gotta be some meaningful profits soon for its sky-high valuations to make any sense. Netflix stock currently trades at 336 times forward earnings, and it has been hemorrhaging cash in the last four quarters, with free cash flows clocking in at more than negative $544 million.
The company has borrowed $1 billion to finance its global expansion efforts, and rivals like Amazon (AMZN) and Alibaba (BABA) aren’t about to stop investing in their own video streaming services.
Bottom Line
I applaud the ambition and rapid expansion of Netflix overseas. But until we see how the pricing and adoption plays out — and whether Netflix’s notoriously high content costs ever come down to sustainable levels — I’d stay far away from this highly speculative play.
As of this writing, John Divine was long Sept. 18, 2015, $102 NFLX puts as well as AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
