On Jan 15, we issued an updated research report on Netflix Inc. (NFLX) following its third-quarter 2014 results. While earnings beat the Zacks Consensus Estimate, revenues remained in line with the same. However, we believe the slow rate of subscriber growth will continue to be a major concern. Nevertheless, expanding and diversified content portfolio will drive growth, in our view. Additionally, the company’s venture into movie distribution is expected to boost subscriber growth over the long run.
Netflix has been expanding beyond the U.S. and now plans to debut in Australia and New Zealand this year. According to reports, 80% of Netflix’s revenues are expected to be generated from the overseas business. Thus, we believe these growing markets would help the company counter any subscriber loss in the domestic market.
Further, Netflix’s growing subscriber base is the primary factor that helped it generate significant revenues. In addition, the company’s paid streaming membership, as a percentage of total subscription, has grown considerably. Going forward, we expect continued improvement in the paid subscriber base of the streaming segment, in both domestic and international markets, to drive top-line growth. These growth factors are expected to generate significant revenue synergies that will outpace content and marketing spending, leading to margin growth.
Netflix faces competition from bellwethers like Amazon.com and Time Warner’s HBO, which also offer online streaming services in the U.S. Verizon’s joint venture with Coinstar, is also expected to intensify competition, going forward. Apart from these domestic players, the company faces significant competition from regional players in the international markets.
International expansion and content additions increased costs in the form of technology investments and marketing expenses. The recent expansions will further dent the company’s profitability in the near term. We believe that Netflix’s ability to effectively manage cost will shape its future prospects.
Stocks to Consider
Netflix currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Geeknet, Inc. (GKNT), Liberty Ventures (LVNTA) and Mercadolibre, Inc. (MELI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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