In the spring of 2012, I outlined a $300 target price for Netflix (NASDAQ:NFLX). The goal seemed lofty, since Netflix shares traded for just $104 at the time. Then again, I gave the stock four years to get there, since my math was based on expected results in 2016.
It's a fair question. Netflix shares are hovering just below that once-audacious $300 level again, and it's only been 17 months. It's high time to revisit the old math and see if it still makes sense. Should investors still expect Netflix to trade at $300 in 2016, or has the company entered a whole new growth trajectory?
This chart will help me answer that question:
As it turns out, I made some overly conservative assumptions in the spring of 2012. For one, domestic streaming numbers have accelerated since then, indicating that Netflix may reach its final destination at 60 million to 90 million U.S. streaming subscribers faster than previously thought. But that's not even the most disruptive point this chart makes.
Netflix is going global -- fast!
Netflix put the pedal to the metal on international opportunities faster than I had expected. My 2016 targets assumed that Netflix would take an extended break from overseas expansion, announcing its next markets in 2013 or maybe even 2014. The final tally included just "a modest contribution from the international market" by 2016, since the expansion here was taking a breather.
Well, four months later, Netflix leveraged its rampant international growth and announced its next expansion way ahead of schedule. Scandinavia was followed by the Netherlands this summer, and that's hardly the end of this aggressive push.
In the recent second-quarter report, management said that the expansion will continue in 2014 based on surprisingly strong results in existing international markets and high confidence in the opportunity ahead. And it's all done with lower overseas content spending than management had expected to need. Oh, and international subscriber totals quietly passed the number of DVD customers.
There's nothing wrong with the domestic market, where streaming subscriptions jumped 25% year over year in the second quarter. But international subscribers more than doubled, and it's only a matter of time before overseas subscribers and revenues outgrow the domestic market.
That's the crossover point that Netflix investors can't wait to see. My updated model indicates that it'll happen sometime in 2016, which means that the domestic value meets its match overseas that year. In other words, I wouldn't be surprised to see subscribers and revenues nearly double the old expectations.
What's the big deal?
Looking at Netflix's current international results, you might wonder why investors should even care about non-U.S. growth. After all, the international division is reporting operating losses amid this rampant subscriber growth. That old joke about balancing negative margins with high volume springs to mind.
But then you're forgetting that it costs money to start new markets from scratch. Netflix has to build some infrastructure in every new territory, and then the marketing blitz begins. Netflix turned its first Canadian profit in 2012, setting the bar for Latin America and the various European markets to follow.
By 2016, all of these geographies will be mature and profitable -- not to mention much larger than they are today. And whatever markets Netflix launches in 2014 should be well on their way to operating profits as well.
In short, overseas subscribers should pull their weight for Netflix profits in 2016. If nothing else, the trajectory toward equal operating margins inside and outside America should be very clear.
The Foolish takeaway
In the final analysis, my old targets have been moved by a strong return to international growth that didn't seem to be on the table in early 2012. I'll be very disappointed if Netflix hasn't doubled again three years from now, because that means either that the domestic addressable market is smaller than expected or that the international bonanza hit a brick wall.
I hope I've answered Brad's question with a very clear "yes." Netflix remains my largest personal holding and my most successful CAPScall to date, and I expect at least three more years of market-crushing success.