Netflix (NFLX) reported fourth-quarter earnings yesterday, and on the surface, they weren’t great. In fact, despite being up after-hours yesterday, Netflix stock is down 6% on Wednesday.
But NFLX sellers are missing one important thing: the company’s strong overseas subscriber growth.
Netflix added 5.6 million subscribers in the fourth quarter, and 4 million of them came from places other than the U.S.
Netflix is now available in 60 countries. And this is only the beginning: The company announced plans to expand into another 130 countries, including Russia and Saudi Arabia, and expects to add another 6 million global subscribers in the current quarter (4.4 million of them international).
Investors Still Love NFLX
That kind of global growth is intoxicating for investors, and enough to offset a 30% decline in earnings per share from the same quarter a year ago. It marked the fourth straight quarter of declining profits. During that time, Netflix stock has risen 115%.
Steady sales growth has certainly helped. Revenues improved 23% in the fourth quarter, just as they did in the previous three quarters. In fact, it has been nearly three years since NFLX has posted anything less than 20% sales growth.
But sales growth without profit growth doesn’t typically result in an 115% return in 12 months. One reason why Netflix stock is different is simply that people love Netflix.
They love the seemingly endless stream (no pun intended) of new, critically acclaimed original programming such as House of Cards, Orange is the New Black and Unbreakable Kimmy Schmidt. They love the convenience of being able to watch shows and movies without having to go out to buy them or aimlessly flip through hundreds of channels on their TV dials. With Netflix, people don’t even need televisions anymore.
But the main driver behind the recent run-up in Netflix stock has undoubtedly been the company’s stellar international growth. All told, NFLX added 17 million new members in 2015, bringing its global total to 75 million (and counting). International subscribers accounted for roughly 70% of that growth.
And therein lies a potential problem.
Earnings a Growing Concern for Netflix Stock
While the international subscriber growth looks and sounds great and makes for favorable Wall Street Journal headlines, in reality Netflix’s global expansion is the very reason its profits have slipped so dramatically. Despite adding 4 million new overseas customers, the company’s international business lost $109 million in the fourth quarter. Basically, it costs NFLX more to put down roots in more remote countries, and those customers pay less for the service than Americans do.
In October, Netflix raised prices by a dollar (to $9.99 a month) for its customers in the U.S., Canada and Latin America. It’s clearly an effort to squeeze more money out of existing North and Latin American customers at a time when sales in those countries, namely the U.S., are slowing.
The 1.56 million U.S. customers NFLX added in the fourth quarter were shy of the 1.65 million analysts were expecting, and down from the 1.9 million subscribers the company added a year ago. That followed a similar script to its third-quarter results, when the 880,000 domestic subscribers added fell short of the company’s 1.15 million-subscriber target.
Because they charge more and it costs less to provide the service domestically, Netflix’s U.S. business is profitable. That’s why the slowdown in U.S. subscribers is a growing concern, and one that could eventually catch up with the company unless its international operations suddenly turn profitable.
Thankfully for Netflix stock, for now Wall Street is focused squarely on the actual subscriber numbers instead of the sliding profits. With NFLX trading at more than 96 times this year’s earnings estimates, that sentiment could change quickly. (Given Wednesday’s slide, perhaps it already is.)
But there’s no denying that the robust overseas growth of the past year has been a boon for Netflix stock. And that was the case again yesterday … at least for a few hours after the market closed.
Until investors definitively turn on NFLX, it’s still a buy. For now.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
