Loyal investors in shares of Netflix Inc (NASDAQ 🙂 have been well rewarded over the years. The streaming giant has been the best performing stock of the past decade and has returned no less than 3,726.2% in 10 years.
But this beautiful history is no guarantee for a better future. Netflix starts the next decade with a lot of uncertainty about its growth, as some of the world's largest companies go after its customers with plans to spend billions of dollars on new content and technology.
Last month, Walt Disney Company (NYSE 🙂 and Apple Inc. (NASDAQ 🙂 launched new direct-to-consumer streaming services. Next year, AT&T Inc. (NYSE 🙂 is planning its new HBO Max streaming service, while Comcast Corp's (NASDAQ 🙂 NBCUniversal will roll out its Peacock platform.
This intense competition means more choices for customers, more pressure on the price and an increasing demand for higher expenses. For example, the Disney + service costs customers $ 6.99 a month compared to $ 12.99 a month for the most popular Netflix option. Comcast is planning a cheap ad-supported service.
Due to this rapidly changing business landscape, Netflix's share has fallen behind in 2019 and has fallen by more than 16% since July, as investors shrink from betting on the company's growth if it is attacked from all sides. The shares have risen in the last four sessions and have risen 7.5% since December 13, ending yesterday at $ 332.22.
In its latest financial update, Netflix has tried to show that it has such a big first-mover advantage when it comes to global markets that it can take years for newcomers to catch up.
Although Netflix first revealed detailed subscriber and revenue information for non-US operations, it reported that it is growing very fast on international markets and is able to make up for revenue losses in North America.
Explosive global growth
In the Europe, Middle East and Africa region, for example, the number of Netflix subscribers grew by no less than 140% between 31 March 2017 and 30 September this year. In that period, sales nearly tripled to $ 4 billion.
Latin America has almost doubled to 29.4 million subscribers from 15.4 million in the same period, while sales more than doubled to $ 2 billion. The Asia-Pacific region more than tripled in the same period to 14.5 million subscribers from 4.7 million and sales increased from $ 116 million to $ 1 billion.
The disclosure of this market-sensitive information is directly aimed at reducing investors' concerns about the sales impact of increasing competition in North America, where Netflix growth has slowed considerably in recent quarters.
According to the submission, the US and Canada are still the most important revenue drivers with the highest average monthly revenue per subscriber. But other regions are not far behind. By the end of the third quarter, the average monthly revenue for US and Canada subscribers was $ 12.36. On a neutral exchange rate basis, the Europe, Middle East and Africa region averaged $ 10.90. This was $ 9.58 in the Asia Pacific region and $ 9.35 in Latin America.
Attracting subscribers worldwide by producing local content is now central to Netflix's growth strategy and the new data suggests that the company is far ahead in this game. Many Wall Street analysts are still optimistic about Netflix shares and predict that the company will continue to surprise investors by attracting more international subscribers every quarter.
Netflix spends $ 15 billion on programming this year, a number that gets bigger as it goes deeper into producing local content.
"We plan to do quite a few expenses," said Chief Executive Officer Reed Hastings at the DealBook conference last month. "We are growing and investing globally. We have been strong in series. Now we are becoming very strong in films." But that strategy has its own risks, especially given that Netflix has to borrow to expand.
Citi analyst Jason Bazinet said in a recent note that Netflix should spend even more on content, or that Wall Street should lower its subscribers' estimates in response to changing market conditions. And none of these scenarios is good for the stock. If Netflix spends more on content, this will damage margins and reduce inventory by 15%, he calculates. While a delay in the number of subscribers may be the least of the two evils, causing a 5% drop in inventory.
Bottom Line
The upward journey for Netflix shares has been largely unhindered in the last decade. But with increasing competition, rising costs and potential saturation in the domestic market, it will be difficult for the streaming giant to produce the same as in the last ten years. Investors must adjust their expectations to take into account new realities.
