Where Netflix (NFLX) Goes From Here

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Now that Netflix (NFLX) has more than 36 million domestic streaming subscribers in the U.S., the company's plans for international expansion show that Netflix wants to be more than just a place Americans watch movies and TV shows. It wants to be the place where the world watches content.

Following a report that saw Netflix earn $1.15 a share on $1.34 billion for the second quarter, the company said on the conference call its total addressable market (TAM) is around 700 million to 800 million broadband households, of which around a quarter of are in China, a market the company isn't even close to entering yet.

CEO Reed Hastings made statements about the company's opportunities in international markets, including ones where the company is expanding this year, including France. "[W]hat we’re trying to do is connecting the world as some of the world’s best content brought to the world’s citizens," Hastings said on the conference call. "And that’s really motivating ... for me, for all the people at Netflix."

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During the quarter, Netflix added 1.69 million streaming subscribers on a net basis, of which 1.12 million came from international markets. Netflix now has 36.2 million streaming members in the U.S. (35.09 million paid) and 13.8 million international (12.91 million paid). That 13.8 million figure rose 78% year over year, so it's clear this is where the growth is coming from at Netflix's stage in its life, as it looks past the domestic market.

Oppenheimer analyst Jason Helfstein raised his price target to $535 on the basis of this growth.

"We believe investors own NFLX mostly for the [international] opportunity, which is scaling faster than expected," Helfstein wrote in a note. "Our new target reflects higher out-year [international subscriptions], as execution remains solid. Existing [international] markets are operating at break-even, while Latin America had normal growth, despite World Cup."

CFO David Wells said that the company would be break-even internationally in the third quarter, had it not been for expansion.

Hastings noted that what the company is seeing is not just indicative of Netflix, but the streaming industry as a whole, particularly as more devices become connected to the Internet:

"But there is probably no better symbol of how strong is on-demand phenomena that to tell you that during the World Cup we were concerned that we would see a drop off around the world, particularly in Brazil and that we didn’t want to over-read it. If we saw a drop off in net adds and growth and what was incredible is just how straight our line of net additions were in Brazil during the World Cup. And that’s nothing I don’t think that we’re specifically doing, it’s really this growing demand for control and for the consumer be able to click and watch what they want. And so that’s why we’re stepping up on the international expansion just because we really see that this is an enormous moment in history as on-demand Internet services are coming to the floor around the world."

Netflix gave third quarter guidance that was below what Wall Street analysts were expecting. It expects to earn 89 cents a share on $1.22 billion in revenue, while adding 3.69 million streaming subscribers. Analysts expect the company to earn $1.06 a share on $1.38 billion in sales.

Cantor Fitzgerald analyst Youssef Squali, who raised his price target to $500 on Netflix, believes that combined with the fact the company is becoming "the leading global OTT [Over-The-Top] provider of quality content to the world's citizens," and the fact revenues are exceeding content costs, the company not only has margin leverage, but strong pricing power over time, allowing it to eventually raise prices, as it did recently. Netflix recently raised the starting price on its 2-device streaming plan, going from $7.99 a month to $8.99 a month.

Netflix is increasingly becoming self-reliant, producing its own shows such as Orange Is the New Black and House of Cards, which allows them to be less subjugated to the whims of stronger content houses, including a combined Time Warner and 21st Century Fox, should a deal take place, according to Chief Content Officer Ted Sarandos.

Citigroup analyst Mark May, who rates Netflix shares neutral, noted that Netflix's international plans are now more important than ever, as the company looks to be the leader in over-the-top content. "In general, the 2Q report highlighted continued solid domestic trends and the increasing importance of new market success internationally. While we continue to have a favorable fundamental view of Netflix and its growth outlook, we also view the valuation as largely reflecting the positive thesis surrounding U.S. and [international] subscriber potential and pricing power."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Technology , Stocks , Travel and Lifestyle

Referenced Stocks: NFLX

Chris Ciaccia

Chris Ciaccia

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