Why Netflix Has Immense Upside From Here

Netflix is becoming supremely dominant in Internet video and hopes to have 48 million global subscribers this quarter. The company's big investments in content are paying off and its margins are on the rise. is now the time to book profits or stay on board for more possible gains to come?

Jan 28, 2014 at 10:40AM

Netflix (NASDAQ:NFLX) has been doing very well lately. The company's subscriber base surged to 44 million members spanning 41 countries. Netflix had a blow-out holiday quarter and it came in well ahead of expectations. The company hopes to surpass 48 million subscribers in the first quarter of 2014, and in the process, cement its position as the largest Internet TV network in the world. 

Margin expansion in domestic
Netflix added roughly 2.33 million subscribers in the U.S., and it now has more than 33.4 million subscribers in the domestic market. The company's subscriber count surged well past those of its competitors, including Amazon.com's (NASDAQ:AMZN) roughly 20 million customers and Hulu's paid subscriber base of 5 million. Also, Netflix expects to add 2.25 million subscribers in the current quarter.

A number of analysts have been skeptical on Netflix and they have downgraded the company's stock which owes to the growth of Amazon. Amazon revealed its subscriber count for Instant Video for the first time and it invested in developing original content as well. However, the growth of Internet TV has lifted the fortunes of both companies and competition between these two companies is rather indirect.

Netflix's scale and subscription revenue model have been critical in expanding margins, as the company expects its contribution margin next quarter to grow to roughly 24.9%. Netflix's management stated that the company is on track to achieve a 30% contribution margin in the domestic market by 2015.

Netflix's DVD business is still doing well with a gigantic DVD selection and it has roughly 6.9 million subscribers. This DVD segment of Netflix still provides valuable contribution profit dollars to the tune of $110 million in the last quarter. Going forward, the DVD segment is expected to scale down very slowly.

International nears profitability
In the last quarter Netflix's international operation achieved a positive gross profit for the first time. The company hopes to make big investments into developing its content library for its European viewers.

A bigger stable of original shows will drive brand awareness in Netflix's international markets, and in turn, aid subscriber growth outside the U.S. Netflix's management hopes to make a big expansion in select European countries during the latter part of 2014.

Netflix's deal with Virgin Media, which will allow its services to be offered via set-top boxes, should aid its growth prospects in the region as well. In addition to Virgin Media, the company also offers the same service in partnership with Waoo! in Denmark and Com Hem in Sweden, and Netflix hopes to add smaller domestic cable providers soon. 

Content is king
The company stated that it will continue to grow its original content budget in 2014. Netflix's management disclosed that some of its original shows saw spikes in viewers due to a host of award nominations and wins that included the Emmys and the Golden Globe Awards.

The company plans to raise $400 million in new debt in the current interest rate environment, which will give it more flexibility in funding more originals. Netflix has been adding differentiated and exclusive content like comedy specials and high-quality documentaries as well.

Netflix will release the second season of House of Cards in February, and this release might lead to very strong subscriber additions. Netflix has kept the door open for movie production and it is considering the production of big budget Netflix-only movies with its ever-growing content budget.

The company is heart-set on developing valuable franchises, as it ordered season 3 of Lilyhammer and it is also adding a final season of The Killingwhich already has a developed audience courtesy of AMC Networks (NASDAQ:AMCX).

AMC had previously canceled The Killing twice, and now Netflix will bring it back for a final farewell. In addition, Netflix will also air episodes from AMC's Better Call Saul, which is a spin-off series from the iconic Breaking Bad, within six months of its airing on cable. AMC had previously stated that Breaking Bad's season finale drew 10.6 million viewers, and thus a strong fan base is already built in. The more content Netflix produces the more valuable its business becomes, which widens the company's moat. 

Going forward
Netflix is unlikely to see headwinds from the net-neutrality law, as the economic interests of Internet service providers and Netflix are pretty much aligned. Netflix continues to invest in improving its user experience and helping viewers discover content from its huge catalog. This will lead to higher customer retention and drive more hours of Netflix viewing, which should limit churn to all-time lows.

The company laid out rosy guidance for the first quarter of 2014; it expects to add 2.25 million domestic subscribers and 1.6 million subscribers outside the U.S. The guidance implies a customer base of more than 48 million subscribers across the globe. Having a gigantic roster of paying customers by itself ensures that Netflix will continue to be a stellar performer and its stock should follow accordingly.

Find out how to profit from the ongoing transformation in entertainment
Netflix may have more upside as noted above, but it's not necessarily the best way to play this revolution. You know cable's going away. But do you know how to maximize your profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Ishfaque Faruk owns shares of AMC Networks and Netflix. The Motley Fool recommends Amazon.com, AMC Networks, and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers