On-demand media giant Netflix Inc. (NFLX, Financial) reported stronger-than-expected results for the fourth quarter of 2014, taking the market by surprise. The company posted sales of $1.48 billion and earnings of 72 cents per share in the quarter. Netflix added 4.33 million new global subscriptions beating the 4.07 million subscriptions added in the year-ago quarter. The company also announced plans to go ‘fully global’ by 2016 end, expecting to profitably reach all 200 of the nations having broadband Internet access in the next two years. The results broke the company’s recent trend, with the stock trading above the volatile price range of $318.83-348.94 in the last one-month period.
International Subscriptions Key to Future Growth
Netflix witnessed higher gains from international subscriptions than those within the US for the third quarter in a row, with a record 2.43 million international customers added in the fourth quarter. The company's total international subscriptions are now 18.3 million. Netflix also added 1.9 million new users in the domestic market, to reach an overall subscriber base of 39.1 million, surpassing HBO’s 32.4 million subscriptions. Although growth of subscriptions within the US are slowing down, Netflix expects US margins to grow from 30 percent in 2015 to 32 percent in 2016 with reduced spending on marketing and content, given that the domestic market currently generates around two thirds of the company’s revenues and almost all of its profits.
Netflix currently boasts a global reach of 57.4 million users. With the company expanding into new markets, it is looking to offer a greater number of original programs that are known to attract new subscribers, create brand loyalty and achieve critical acclaim. In 2015 alone, Netflix plans to offer original series -returning and new, stand-up comedy specials, documentaries and films to the tune of 320 hours, which is three times the company’s 2014 offering. The global push is also expected to speed up revenue growth for Netflix, affording the company adequate cash flow for the development and licensing of new content. Consequently, the company aims to work on licenses to enter the Chinese marketplace in 2015, albeit on the back of a modest investment.
The Road Ahead
With Netflix reporting net earnings of $1.35 per diluted share in the fourth quarter of 2014 (an increase of 70 percent over the previous year) and earnings of $4.32 per diluted share for the full year (a whopping 135% rise from a year ago), the company’s shares are flying high in the market.
However, in spite of the company posting robust fourth quarter results and revenues seeing a 25 percent growth from prior-year figures at $1.5 billion, the going has been far from smooth for Netflix in 2014. The company’s share value has depreciated 30% since mid-2014 with investors fretting over extravagant spending on original productions, losses involved in global expansion and market slowdown in the US. For instance, the company’s spending on movie and TV productions swelled from $7.3 billion in 2013 to $9.5 billion in 2014.
Further, in the recent months, Netflix has been under pressure of growing competition from Hulu, Amazon.com (AMZN, Financial) and Time Warner Inc.’s HBO (TWX, Financial) on the one hand and on-demand products offered by pay TV providers on the other. With Netflix spending around $10 million per quarter on ISP access, the company is also hoping to see the Obama administration push for net neutrality and reduction of carriage fees for over-the-top players amid opposition from the FCC.
For 2015, Netflix foresees 1.8 million new customers being added to its subscriber base within the US, leading to around $37 million (or 60 cents per share) in profits. The company also expects to add a further 2.25 million international users in the first quarter of 2015, spreading its subscriber base from the current 50 to all 200 nations with broadband Internet connection by 2017. The increase in international investment and thrust on a greater number of original programs are expected to boost growth for Netflix, with experts looking at net ads to step up in 2015 after clocking a 13 million growth in 2014. Netflix is projected to post $6.9 billion in revenues and $6.00 per share in earnings for the full year 2015. The accelerated global rollout is also expected to boost Netflix’s profits in and beyond 2017.
Final Thoughts
With increasing international subscriptions and a loyal domestic customer base, Netflix is poised to exploit its fourth quarter earnings to push towards a diverse array of original programs while squeezing marketing expenditure. However, although the company is set to aggressively roll out its global expansion plans, Netflix still has a long way to catch up with HBO’s current 127 million global subscriber base. Growing competition from smaller pay TV providers and larger industry contemporaries, along with policy level decisions regarding issues such as net neutrality are expected to impact the company’s profits in the years to come.
For the short term, though, experts foresee revenues and earnings to continue on the same trajectory as 2014, with probable growth in the high 20”²s. Although the company’s stock currently offers neither high cash flow nor predictability, investors could be willing to pay a premium against the possibility of a greater than 25 percent growth. However, Netflix shares are likely to remain volatile with a price-to-earnings multiple of 75x, earning the stock a ‘hold’ guidance from market experts.
