As Netflix (NFLX 1.74%) stock continues to soar, seemingly reaching new highs every day, it's more important than ever to understand the company's catalysts for growth. This is why investors are keenly interested in Netflix's international expansion, arguably the company's most important growth driver.
Here's a review of the current state of its international initiatives, as well as a look at its plans for further international expansion.
Image source: Netflix.
Rapid growth
Illustrating how key Netflix's international markets already are to the company, more than 35% of Netflix's 65 million members are international. Going forward, its member base will be increasingly skewed toward international members.
Today, the company is adding significantly more members each quarter internationally than it is in the U.S. In Q2, for instance, 2.4 million of its 3.3 million net member additions were from international markets.
Netflix's international growth looks poised to continue at a rapid pace. After a successful launch in Australia and New Zealand in March, the company has a handful of other launches already scheduled: Japan in Q3 ,and Spain, Italy, and Portugal in Q4. And in 2016, Netflix plans to launch in the important Chinese market.
Management said in the company's second-quarter letter to shareholders that it intends to make Netflix "available throughout the world by the end of 2016." Further, Netflix's international expansion embodies more than simply launching U.S.-targeted shows in other countries and hoping they catch on with consumers.
"Our global expansion extends to our content strategy, as well," Netflix management said in the company's letter to shareholders. Global markets are considered carefully in the conception stages of Netflix's growing portfolio of originals, management asserts.
Sense8, Chef's Table, Dragons: Race to the Edge, and Orange is the New Black, for instance, all have a large audience globally, management said in its second-quarter letter to shareholders. And this wasn't an accident. The company strives for its original programming to "reach a large audience globally," the letter reads.
Taking international content strategies to the next level, this month, Netflix is targeting more specific global markets by launching its first non-English language originals: Club de Cuervos, and Narcos.
Expect greater international losses
While Netflix's rapid international growth is driving heady top-line growth, with second-quarter international revenue soaring 48% year over year in Q2, expansion is weighing on profitability. Launching in a new market initially requires outsized marketing and operating outlays to successfully attract new customers and establish a meaningful presence.
Netflix's international contribution loss, for instance, worsened from a $65 million loss in Q1 to a $92 million loss in Q2. The company blamed the greater loss on a jump in operating costs to support launches in Australia and New Zealand.
Going forward, investors should expect more of the same, management warns in its second-quarter letter.
We expect this trend to continue in the second half as we launch additional markets (Japan in Q3 and Spain, Italy and Portugal in Q4) and prepare for further global expansion in 2016, including China as we continue to explore options there.
Longer term, however, management expects international markets to be accretive to earnings. Indeed, management expects improving global scale to help the company achieve "material global profits in 2017 and beyond."
With shares up more than 100% in the past 12 months and about 55% in the past three months alone, investors should watch Netflix's international expansion closely. Given the robust growth priced into the stock, investors should hold Netflix's international growth to high standards, expecting excellent execution that meets, or even exceeds, management's outlook.
