In July 2011, Netflix, Inc. (NASDAQ:NFLX) infamously raised prices 60% and tried to spin its DVD-by-mail business off into something called Qwikster. The idea angered many subscribers and scared off would-be users … and it sent Netflix stock hurtling toward earth.
At the time, NFLX stock was trading at all-time (pre-split) highs near $300. By year’s end, it was down in the low $60s, and would later dip as low as $53. On Wall Street, at least, it seemed as though Netflix shares would never recover.
They did, of course, but fast-forward to this year. Netflix again hiked streaming prices, this time from $7.99 to $9.99 per month for the majority of its subscribers. Though subscribers haven’t jumped ship the way they did five years ago, the company’s subscriber growth has slowed to a relative crawl: in the second quarter, Netflix added 160,000 new members in the U.S. and 1.5 million internationally — well shy of the 500,000 domestic and 2 million international additions it had forecast.
The response wasn’t nearly the same as it was after the Qwikster catastrophe, but investors still began to sell out of Netflix stock after the price hike. In the month following the announcement, NFLX was off by about 17%. Even after a small bounce-back, Netflix is down more than 10% for the year-to-date.
Are Third-Quarter Earnings Pivotal for NFLX?
In theory, all this makes today’s after-market Q3 earnings report one to watch carefully. Netflix does expect things to pick up — 300,000 new U.S. subscribers, or nearly double the previous quarter. But that’s still well off last year’s pace.
Price hike or not, U.S. subscriber growth was bound to slow, if only because Netflix is reaching saturation here in America.
International growth is the more important number, and Netflix is expecting a bounce-back there, too, to 2 million added. The company expanded to 130 countries in January, triple the number of countries it had just a year before. Yet penetration in those countries — or elsewhere, like China, Netflix’s proverbial “White Whale” — is extremely low when compared to America’s. In the U.S., 61% of Internet users subscribe to a streaming video service, compared to just 33% in the U.K., 30% in Germany and 11% in France. It’s much lower in other, more remote countries.
Right now, U.S. sales comprise about 60% of Netflix’s total revenues. As it continues to expand its global reach into more countries — and as the countries it’s already in become more streaming video-savvy — Netflix’s revenue pie will shift more toward international sales. Even though its international business is not yet profitable, that’s where the future lies for NFLX.
Netflix has come a long way in the past five years. When the stock crashed in 2011, the company still relied heavily on its DVD-by-mail business. It would be another 18 months before it started producing and streaming original content such as House of Cards, Narcos and Stranger Things. Those shows were nominated for 34 Emmys this year.
Netflix Stock Still a Long-Term Buy
“Imagine what Netflix will be five years from now.”
That’s what I tell investors who ask if it’s time to sell out of NFLX, and they do ask that — a lot more over the past few months than they have in some time.
Listen, don’t let this down year fool you. Netflix still is a fast-growing company with a brand that’s attaining near-universal recognition here, and will soon around the globe.
Even if NFLX falls short of earnings expectations and subscriber growth tonight, don’t sweat it. View any dip as a buying opportunity into one of the market’s highest-potential stocks.
Five years from now, 2016 will be viewed as just a speed bump en route to good times for the bulls.
Just like 2011.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
