Netflix, Inc. Is Fast Becoming The Dominant Player in Online Streaming

Netflix is increasingly seeing its share of total usage rise. Netflix has a much longer runway of growth than its Internet TV rivals such as and Hulu.

May 25, 2014 at 10:00AM

Internet-streaming juggernaut Netflix (NASDAQ:NFLX) is increasingly becoming a larger player globally. The company is seeing its usage increase and it is seeing rapid adoption outside the U.S. as well. The company has a long runway of growth ahead and its stock price should follow. Netflix's high-quality original shows give non-subscribers a very good reason to subscribe to the company's low-price service.

Bigger share of Internet traffic
The leading Internet video-streaming service remains a major force in Internet traffic. Netflix now accounts for 34.2% of peak time downstream traffic in North America, up from 32% in 2013, according to Sandvine. Netflix has continued to get a bigger chunk of online traffic and remains a favorite of binge-viewing consumers in North America during the evening hours. 

Even more impressive is the fact that Netflix remains light years ahead of its competitors in this regard. The company's major competitor in the Internet-TV space, Amazon (NASDAQ:AMZN), has less than half of Netflix's subscriber base of 48 million. Peak downstream usage of Amazon's Prime Video stood at less than 2%, according to Sandvine.

Amazon has recently disclosed that it has more than 20 million subscribers for its Prime service. However, Internet traffic trends clearly suggest that Netflix rules supreme in the living room of its customers and continues to gain more consumer mind share.

Strong future ahead
The number of U.S. households that connect to the Internet through TV or streaming devices grew by 6 million in the last year and now stand at 42 million, according to the NPD Group. As more Internet-streaming players hit the market even more customers will subscribe to streaming services. Devices like Roku, Apple TV, Google Chromecast, and Amazon's Fire TV are gaining consumer acceptance and will broaden the addressable market of streaming services that include Netflix, Amazon Prime, Hulu, etc.

Secular forces are clearly aiding the growth of Netflix in the U.S. and will enable the company to grow its subscriber count further down the road. At the end of its second quarter of 2014, Netflix should have 36.2 million U.S. subscribers according to its guidance, but this still remains far away from the CEO's long-term target of 60 million-90 million U.S. subscribers. Higher-quality original content will provide substantial tailwinds for achieving that subscriber target laid out by management. 

Netflix had a very public brawl with Comcast (NASDAQ:CMCSA) over net neutrality. Netflix's Reed Hastings stated that his company very reluctantly paid "Internet tolls" to Comcast, the largest ISP in the country, to ensure that quality of service didn't drop for Netflix viewers. Also, he was vocal in speaking against the Comcast and Time Warner Cable merger. The combination of Comcast and TWC will yield a lot of power as they will have more than 30 million subscribers and more power against streaming companies like Netflix and YouTube. 

However, the payments made by Netflix to Comcast and other ISPs likely make up a small fraction of Netflix's total revenue, and shouldn't impact the company's robust growth in operating income and earnings per share. Netflix should earn $1.12 per share in the current quarter, according to the company's guidance which implies EPS growth of 130% year-over-year. In addition, the FCC is reviewing its net neutrality rules so this cost might disappear from Netflix's financials if the Internet is kept free and discrimination doesn't take place against Internet-streaming companies.

Long international growth trajectory
Outside of the U.S., Netflix is now the second-largest source of traffic during the peak evening period and makes up 17.8% of downstream traffic in the U.K. and Ireland, according to Sandvine. Netflix continues to grow its brand awareness in the European region and in the 40 countries in which it operates. The company stated that it will make investments in Europe in the back half of 2014 and this will fuel subscriber growth in the region. 

Netflix had 12.7 million international subscribers at the end of the first quarter, and over time this will come to represent a much larger addressable market than the domestic subscriber base. In addition, the international operation of the company has seen its margins expand and losses narrow in each of the last several quarters, and incremental subscriber growth will pave the way for Netflix to achieve contribution profits from its international business. 

In the long term, Netflix could easily rack up 30-40 million subscribers outside of the U.S. and generate close to 40%-50% of its revenue from its international operations. 

The takeaway
Netflix has a long runway for international growth and its domestic market still has tremendous growth potential as well. The company's stable subscription model will enable Netflix to make massive bets on high-quality original shows and thus become a household name across the globe. The recent price correction makes the stock price very attractive, as Netflix is becoming very dominant in the Internet video-streaming space.

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Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends, Apple, Google (C shares), and Netflix. The Motley Fool owns shares of, Apple, Google (C shares), 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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