Faithful investors in shares of Netflix Inc (NASDAQ:NFLX) have been well rewarded over the years. The streaming giant has been the best performing stock of the past decade, returning a staggering 3,726.2% in 10 years.
But this splendid history is no guarantee of a brighter future. Netflix is starting the next decade with a lot of uncertainty about its growth as some of the world’s largest companies are going after its customers with plans to spend billions of dollars on new content and technology.
Last month, Walt Disney Company (NYSE:DIS) and Apple Inc (NASDAQ:AAPL) launched new direct-to-consumer streaming services. Next year AT&T Inc (NYSE:T) plans its new streaming service HBO Max, while Comcast Corp's (NASDAQ:CMCSA) NBCUniversal will roll out its Peacock platform.
This intense competition means more choices for customers, more pressure on pricing and an increasing demand for higher spending. The Disney+ service, for example, is costing customers $6.99 a month compared with $12.99 a month for Netflix’s most popular option. Comcast is planning a low-cost ad-supported service.
Due to this fast changing business landscape, Netflix stock has lagged behind in 2019 and lost more than 16% since July as investors shy away from betting on the company’s growth when it’s being attacked from all sides. The shares have been rising over the past four sessions, however, gaining 7.5% since Dec. 13, closing yesterday at $332.22.
In its latest financial update, Netflix tried to show that it has so great a first-mover advantage when it comes to global markets that it may take years for the new entrants to catch up.
While disclosing for the first time its detailed subscriber and revenue information for non-U.S. operations, Netflix reported that it’s growing very rapidly in international markets and is in a position to make up for any revenue loss in North America.
Explosive Global Growth
In the Europe, Middle East and Africa region, for example, Netflix's subscriber base grew by a whopping 140% between March 31, 2017 and Sept. 30 this year. Over that time span, sales nearly tripled to $4 billion.
Latin America has nearly doubled to 29.4 million subscribers from 15.4 million in the same period, while revenue more than doubled to $2 billion. The Asia-Pacific region has more than tripled during the same period to 14.5 million subscribers from 4.7 million, and revenue has increased to $1 billion from $116 million.
The disclosure of this market-sensitive information is directly aimed at soothing investor concerns about the revenue impact of intensifying competition in North America where Netflix's growth has markedly slowed in the past couple of quarters.
According to the filing, the U.S. and Canada are still the major revenue drivers with the highest average monthly revenue per subscriber. But other regions aren’t far behind. By the end of third-quarter, the average monthly subscriber revenue for the U.S. and Canada was $12.36. On a neutral exchange basis, the Europe, Middle East and Africa region averaged $10.90. In the Asia-Pacific region, it was $9.58 and in Latin America $9.35.
Attracting subscribers globally by producing local content now becomes central to Netflix's growth strategy and the new data suggest that the company is way ahead in this game. Many Wall Street analysts are still bullish on Netflix stock, and are predicting the company will continue to surprise investors by bringing in more international subscribers each quarter.
Netflix is spending $15 billion on programming this year, a number that will become bigger if it goes deeper into producing local content.
“We plan on taking spend up quite a bit,” Chief Executive Officer Reed Hastings said last month at the DealBook conference. “We’re growing and investing around the world. We’ve been strong in series. Now we’re getting really strong in movies.” But that strategy has its own risks, especially given that Netflix will need to borrow to expand.
Citi analyst Jason Bazinet in a recent note said that either Netflix needs to spend even more on content, or Wall Street needs to lower its subscriber estimates, in response to the changing market conditions. And neither of those scenarios is good for the stock. If Netflix spends more on content, it will hurt margins and cause the stock to drop by 15%, he calculates. Whereas a slowdown in subscriber additions may be the lesser of the two evils, causing a 5% pullback in the stock.
Bottom Line
The upward journey for Netflix shares has been largely unhindered through the past decade. But with the increasing competition, rising costs, and potential saturation in the domestic market, it will be difficult for the streaming giant to produce the same kind of explosive returns as it did in the past ten years. Investors should adjust their expectations to factor in new realities.