Source: Netflix.
Netflix (NFLX 4.17%) was jumping by a whopping 6% on Tuesday as investors reacted with optimism to the company's latest earnings report. Netflix is growing its user base at an impressive speed, increasing its profitability levels, and consolidating its competitive strengths against Amazon.com (AMZN 1.30%) and other industry players. Keeping these considerations in mind, Netflix looks well positioned to continue to outperform.
Growing at full speed
Netflix added 4 million members including both the U.S. and international markets during the first quarter of 2014, which brings the total base to 48 million global subscribers. The company is not only growing at a rapid rate, but growth is even accelerating, as this is a considerable increase versus the 3.05 million members Netflix added in the first quarter of 2013.
Netflix gained 2.25 million members in the U.S. during the quarter, for a total of 35.67 million members, of which 34.38 million were paying subscribers. This compares favorably against the 2.03 million net additions in the first quarter of 2013, and it shows that growth is still accelerating in the U.S., where Netflix has a substantially higher penetration rate than in international markets.
In global locations, the company added 1.75 million new members, reaching a total of 12.68 million members in that segment, 11.76 million of those being paying members. In the first quarter of 2013, Netflix had gained 1.02 million members, so growth is also accelerating in international markets.
For the second quarter of 2014, management expects 1.46 million new members. This would be a slowdown versus the first quarter due to seasonality, but a considerable increase versus 1.24 million additions in the second quarter of 2013.
Increasing profitability
Content costs are expensive, so Wall Street analysts have long been concerned about Netflix's ability to generate recurring profits. However, the company has delivered consistently rising profit margins over the last several quarters, and the latest earnings report was no exception at all.
Total contribution margin was 15.6% during the first quarter of 2014, more than double the total contribution margin of 7% reported in the same quarter of the prior year. For the second quarter of 2014, management forecasts a contribution margin of 18.5%. versus 10.2% in the second quarter of 2013.
Contribution margin in the U.S. came in at a big 25.2% versus 20.6% in the first quarter of 2013. In international markets, Netflix materially reduced its losses from a negative contribution margin of 54.2% in the prior year to a negative 13.1%.
Management expects to achieve a positive contribution margin in international markets during the current year, even if the global segment will remain at a net loss as Netflix invests heavily for expansion in Europe over the coming quarters.
Competitive differentiation
Competition is always an important risk to watch in a dynamic business like streaming, especially when it's coming from a bigger and more aggressive player such as Amazon. The online retail giant has built a huge library with over 40,000 movies and TV shows freely available for streaming to Amazon Prime subscribers, and the company has recently launched its Fire TV set-top box to expand into hardware and consolidate its position in streaming.
Amazon's Fire TV offers impressive specifications for a competitive price, and it could provide some leverage to Amazon in the war for the living room. On the other hand, Netflix is stronger than ever when it comes to exclusive content, a key differentiating factor in the business.
House of Cards season 2 was a huge success for Netflix, and the company will soon be launching season 2 of both Derek and Orange Is the New Black. The summer lineup includes titles such as Hemlock Grove season 2, the animated comedy series BoJack Horseman, and the final six episodes of The Killing.
Netflix has an extremely valuable strategic asset in its proprietary data analytics technology that allows it to evaluate the tastes and viewing habits of consumers, and this is very helpful in terms of purchasing or producing successful content.
Content is king in the industry, and a high-quality library of content differentiates Netflix from the competition.
Bottom line
Strong and even accelerating growth in subscribers, consistently increasing profitability with expectations for higher margins in the future, and a consolidating competitive position based on high-quality content differentiation. That's three big reasons to buy Netflix after its latest earnings report.
