For Netflix, Inc. , revenue growth is largely drawn from overseas growth, noted analyst Laura Martin at Needham & Co in a note on Thursday. Netflix is saw a surge in its overseas growth in the second quarter, pushing shares up by more than 17% on Thursday. The firm’s earnings were better than expected in its Wednesday release.
Global expansion pushing stock up
Netflix added 2.5m subscribers globally in the 2Q, and a million more in the US, bringing the total to 65m. Martin noted the firm has a payback period offshore around half as long, which is two times more profitable as in the US. “Netflix is going to go from 50 countries to 200 countries penetration in the next 18 months. We think that’s what’s driving the stock price up,” She said.
Martin noted that the investors stand a good chance to earn not only from an increase in subscriber base, but also from an unexpected spike in the prices overseas. Martin noted that Netflix hinted for the first time about increasing the price by 5% globally. The streaming firm has 31 tiers across the globe, and will start raising the prices ‘selectively.’
Also, Netflix has decided to hike its fee by $1 for some new users in the US, starting next year. Lead Internet analyst Mark Mahaney at RBC Capital Markets believes the hike is risky, but the firm has the pricing power to manage the hike successfully.
China, still a concern for Netflix?
During the earnings call, Reed Hastings led firm informed that it may delay its China plan beyond next year. Martin stated that this would be a major issue only when the local content is more vital that U.S. content. Generally, Netflix enters a new market with a 65-35 split between the US and local content, Martin noted.
“If you think China’s local programming is super, super important then Alibaba might get traction,” she said, adding the U.S. global content is more important in her view. That’s why Netflix has an edge over anyone in China because they have global deals with the big seven studios in the US.
The research firm raised its price target noting growth is difficult to find in this market, but Netflix has been a growth firm for over three years, “so we would expect growth investors to continue to be attracted to this stock.”
Martin further said that digital markets are becoming the winner-take-all, and the online streaming firm has an “enormous” lead as it brings offers premium content and moves aggressively globally to outperform the would-be rivals.