Netflix, Inc. (NASDAQ:NFLX) shares jumped nearly 8% to $116.55 in after-hours trading on January 19, after the video-streaming firm reported that it added a record 5.59mn subscribers in Q4 2015. The figures surpassed estimates of a 5.15mn increase in the number of subscribers for the quarter, bringing its global customer base to 74.76mn. Netflix, Inc. (NASDAQ:NFLX) expects its worldwide membership to grow by 6.1mn users for the current quarter.
The better-than-expected growth comes on the heels of the firm’s aggressive global expansion plans and heavy spending on original programming such as ‘Marvel’s Jessica Jones’, ‘Orange is the New Black’, ‘Narcos’ and ‘Beasts of No Nation’- its first feature film released in 2015. The video company also plans to launch more than 600 hours of original programming in 2016, compared with 450 hours in 2015.
The Los Gatos, California-based firm had earlier in January announced its expansion to 130 more countries, including key high-growth markets such as India, Indonesia and Russia. It is expected to complete its global rollout by end- 2016, with service in South Korea, Singapore, Hong Kong and Taiwan scheduled to start early in the year. The decision is expected to further boost Netflix, Inc.’s subscriber base and significantly improve its ARPU in the coming quarters.
Positive Outlook for Netflix, Despite Challenges
The company, which has revolutionized the world of television with its option of binge-watching the latest TV shows, is not without its problems. Its US subscriber base grew by 1.56mn customers in Q4 2015, falling short of its target of 1.65mn additions. Netflix, Inc.’s fourth quarter profit was down to $43.18mn or 10 cents a share, compared with $83.4mn or 19 cents a share in the previous year. The decline was attributed to the higher costs for content and expansion, which may have resulted in a slowdown in its domestic subscriber base.
‘Our high penetration in the US seems to be making net additions harder than in the past,’ said CEO Reed Hastings on the lower numbers.
The firm also blamed the issue of persisting involuntary service cancellations due to its failure to resolve the payment process from users having debit and credit cards which were changed to chip-based technology.
Netflix, Inc. (NASDAQ:NFLX) is also yet to penetrate in China, which can be an important growth market. In its latest earnings report, the firm stated that in China, it has ‘work and uncertainty ahead’ and may be able to offer the service there in 2016 or ‘it may take longer’.
Apart from these, Netflix, Inc. faces the challenge to provide diverse programming options to cater to the varied tastes and languages of people in the 190 countries that it now offers services in. It also has to compete against rivals Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc’s (NASDAQ:GOOG) Youtube for bidding rights.
Mark Mahaney, analyst at RBC Capital markets, is optimistic about the firm’s future for the next 3-4 years. ‘In terms of long-term valuation, the way we think about the stock is we think this is a company that can generate $10 [annual earnings per share] in long-term earnings power. If that’s true, we think that’s a $200 stock somewhere in the next three to four years,’ said Mahaney, speaking to CNBC’s ‘Tech Bet’ on January 19.
Meanwhile, Wall Street analysts have updated their outlook on the company. FBR & Co. analyst Barton Crockett on January 20 lowered his price target on Netflix, Inc., while maintaining an ‘outperform’ rating. ‘ While the international opportunity is larger than the U.S., we believe that the U.S. is the model of what is to come abroad, so clearer evidence of maturity in the U.S. is a slight net negative in that it weighs against blue-sky growth hopes abroad,’ sais Crockett. ‘Plus, Netflix faces a debt-based financing need in tough credit markets—a slight, but more than negligible, risk at a time of financial market instability,’ the analyst added.
Cowen & Co. analyst John Blackledge raised his price target by $5 to $155 and maintained an ‘outperform’ rating on the firm. ‘Netflix reported solid fourth-quarter results as international net adds crushed consensus. Netflix first-quarter U.S. sub guide was a bit lighter than expected, offset by significantly stronger international sub guidance,’ said Blackledge.