Netflix (NFLX +0.10%) shareholders beat the market by a wide margin in 2017 as the streaming video giant grew from a $52 billion market capitalization to over $80 billion. A few big things went right for the business, and these developments added weight to CEO Reed Hastings' prediction that the subscription internet TV revolution is "likely to be very big and enduring."
Netflix executives believe the adoption of internet TV will be comparable to the shift from radio to broadcast television that sparked decades of phenomenal growth for content producers and distributors. 2017 gave investors a taste of what that expansion could mean for industry's leading service.
Image source: Netflix.
The wind at its back
The demand for its streaming video service far outpaced the management team's targets in 2017. Through the first three quarters of the year, in fact, Netflix added 15.5 million new users, or nearly 3 million more than it had predicted.
That gap includes an extra 900,000 members that signed up during the fiscal third quarter. As a result, Netflix saw a 49% membership bump at its last outing, compared to the 23% increase that Hastings and his team had forecast. The increase put the company on pace to log its fourth consecutive year of accelerating membership gains.
Data source: Netflix filings. Subscriber growth in millions. 2017 includes management's Q4 forecast. Chart by author.
Netflix is officially a global enterprise now that its international membership base recently passed 50% of the total. Growth in this segment is important because it supports the idea that its worldwide user base will expand well beyond the current 100 million members.
Netflix envisions achieving between 60 million and 90 million members in the U.S. -- compared to 51 million today -- and likely two or three times that total across its other markets.
Ringing the register
All this growth happened in the context of rising prices, which helped power an impressive spike in Netflix's profitability in 2017. Sure, segment operating margin in the core U.S. market drifted below the 40% record that it reached early in the year. However, Netflix is managing the business with an eye toward lifting global profitability now that it has finished its international expansion process.
Investors were told in late 2016 that they could expect to see profit margin rise from 4% to around 7% in 2017, and that prediction is playing out. Meanwhile, several operating trends point to additional improvements ahead. Customers aren't balking at price increases, for one. And Netflix's international markets have finally reached the point where they are contributing to, rather than detracting from, earnings.
Data source: Netflix filings. International profit contribution in millions. Q4 is management's projection. Chart by author.
Netflix hasn't issued a specific long-term profitability forecast, except to say that the figure should steadily increase from this year's 7% mark as the team balances its growth goals against profit desires. But the 2017 results suggest operating margin could easily reach the double-digit record that Netflix enjoyed back when it a (highly profitable) DVD-by-mail business.
Looking ahead
Of course, not everything went according to plan for Netflix in 2017. Some of the biggest investor disappointments included original series flops, spiking debt levels, and the loss of the streamer's exclusive movie deal with Disney.
Yet each of these challenges is a consequence of Netflix's accelerating growth and its newfound global scale. In that way, they are nice problems to have as the streaming video service enters its second decade of existence.
