Lets Netflix and Chill! Netflix and Make Moni!
What’s Going On Here?
Netflix’s stock jumped to a new all-time high on Monday after it reported its latest set of financial results: its revenue, profit and number of subscribers all beat Wall Street’s expectations… and Netflix promised to spend even more billions on developing new content.
What Does This Mean?
Netflix gained over 5 million “net” new subscribers in the past quarter (i.e. after accounting for canceled subscriptions). Most of those new subscribers came from outside the US – which is important because so many people in the US already have Netflix that it needs to grow internationally if it’s going to meet investors’ expectations for subscriber growth. In order to attract all these new subscribers, Netflix is spending more and more on developing original content (think: shows like Stranger Things or Narcos).
Why Should I Buy Netflix Stock in October, November, December 2017?
The bigger picture: Netflix is spending a ton of money on content.
Netflix said on Monday that it has already committed to spending $18 billion over the next few years on exclusive content – a huge amount of money! Netflix is betting that eventually its annual subscription income will far exceed the cost of producing content, and it will reap the profits (right now, Netflix spends about $500 million more than it makes each quarter). The risk is that Netflix will continually need to spend more on content than it makes in revenue, and that it consequently may be running an unsustainable business model.
Netflix Stock results for 3rd Quarter 2017:
Netflix’s stock price had already gone up a lot prior to Monday’s results.
After beating expectations, it may have been a surprise that Netflix’s stock jumped less than 2% following its results – but Netflix’s stock had already risen over 60% so far this year and 15% over the past two weeks. Also, high-profile research analysts had already advocated buying the stock. In short, investors’ high expectations were likely already reflected in Netflix’s stock price – so even strong financial results weren’t able to push its stock dramatically higher.
Netflix is an American entertainment company founded by Reed Hastings and Marc Randolph on August 29, 1997, in Scotts Valley, California. It specializes in and provides streaming media and video-on-demand online and DVD by mail. In 2013, Netflix expanded into film and television production, as well as online distribution. As of 2017, the company has its headquarters in Los Gatos, California.
Netflix’s initial business model included DVD sales and rental, although Hastings jettisoned DVD sales about a year after Netflix’s founding to focus on the DVD rental by mail business. In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. The company expanded internationally, with streaming made available to Canada in 2010 and continued growing its streaming service from there; by January 2016, Netflix services operated in over 190 countries.
Netflix entered the content-production industry in 2013, debuting its first series, House of Cards. It has greatly expanded the production of both film and television series since then, offering “Netflix Original” content through its online library of films and television. Netflix released an estimated 126 original series or films in 2016, more than any other network or cable channel.
As of October 2017, Netflix had 109.25 million subscribers worldwide, including 52.77 million in the United States. Their efforts to produce new content, secure the rights for additional content, and diversify through 190 countries has resulted in the company racking up billions in debt: $21.9 billion as of September, 2017, up from $16.8 billion from the same time the previous year.
Netflix’s headquarters are in 100 Winchester Circle, Los Gatos, California, USA. They also have other offices in the Netherlands, Brazil, India, Japan and Korea.
From Netflic Q3 SHAREHOLDER’S REPORTS
Netflix Q3 Results and Q4 Forecast:
Global streaming revenue in Q3 rose 33% year over year, driven by a 24% increase in average paid
memberships and 7% growth in ASP. Operating income nearly doubled year-over-year to $209 million
with our Q3 global operating margin of 7.0% putting us right on track to achieve our full year target of 7%. EPS of $0.29 included a pre-tax $51 million non-cash loss from F/X remeasurement on our Euro bond (or $39 million after tax based on a 24% tax rate). Higher than expected excess tax benefit from stock based compensation benefited our tax rate by $5 million vs. our forecast. As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report.
Netflix Q3 Results:
We added a Q3-record 5.3 million memberships globally (up 49% year-over-year) as we continued to
benefit from strong appetite for our original series and films, as well as the adoption of internet
entertainment across the world. Relative to our guidance of 4.4 million net adds, we under-forecasted both US and international acquisition. Year to date net adds of 15.5 million are up 29% versus last year.
Domestic contribution margin in Q3 of 35.8% vs. 36.4% last year was below our forecast of 37.1% due primarily to the earlier-than-anticipated close of certain content deals. The foreign currency impact in the quarter was +$13 million and Q3 international revenue grew 54% year over year, excluding currency. F/X-neutral ASP increased 7.4% year over year. International contribution profit margin of 4.7% exceeded our 2.3% guidance, also due to the timing of content deals.
For Q4, we forecast global net adds of 6.30m (1.25m in the US and 5.05m internationally) vs. 7.05m in
the year ago quarter (which was our all-time high for quarterly net adds).
We recently announced price adjustments in many markets to our HD and 4K video plans while keeping our SD plan mostly unchanged (still $7.99 in the US, for instance). Existing members will be notified and their prices will be adjusted on a rolling basis over the next few months. Increased revenue over time will help us grow our content offering and continue our global operating margin growth.
Netflix projected growth and why you should buy Netflix stock:
We’ve been focused on growing global operating margin as our primary profitability metric since hitting our 2020 US contribution margin goal of 40% this past Q1. This allows us to avoid near term
optimization for specific domestic or international contribution margin targets which could impede our long term growth. For instance, we anticipate our Q4’17 US contribution margin will be 34.4% (a decline both year-on-year and sequentially) as we boost our marketing investment against a growing content slate. We spend disproportionately in the US to generate media and influencer awareness for our programming which we believe, in turn, is an effective way to facilitate word of mouth globally.
In our international segment, we are on track to generate positive contribution profit for the full year. As we move into 2018, we aim to achieve steady improvement in international profitability and a growing operating margin as our success in many large markets helps fund investments throughout Asia and the rest of the world.
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