The stock price of Netflix (NFLX -4.48%) has seen a big recovery in the last month after a heavy pullback in the broad tech sell-off. However, Netflix remains a very sound and fundamentally strong business with not only growth in subscribers but also large expected growth in earnings per share. The company is increasingly making its content more differentiated while simultaneously expanding into new countries. In the long run, Netflix will outperform for these three crucial reasons.
Leader in the space
Netflix is the leader in the Internet TV space, and is also the low-cost provider. The company now has more than 48.3 million subscribers and should end the current quarter with just shy of 50 million worldwide subscribers. Netflix remains a pure-play video entertainment platform and has far more subscribers than its two main over-the-top competitors.
Amazon(AMZN -1.84%) has north of 20 million subscribers for its Prime Video service, but many customers choose Prime because of the two-day unlimited shipping service that comes with Amazon Prime. With an increasingly large number of services available on Prime, the service is somewhat of a hodgepodge, and is not as simplified and easy to use as Netflix.
Netflix offers a high-quality user interface and based on the quality of content on the company's platform the company is a low-cost provider relative to HBO, Amazon Prime and Hulu Plus. Amazon Prime and Hulu doesn't have the wide breadth of content available on Netflix and HBO has very good content but is a premium add-on to cable for roughly $15/month. And its consumers have brought about new-age terms like "binge viewing", or watching an entire season of a TV show in a few days. And Netflix's brand value is on the rise because of its large and growing customer base. Netflix's offering is arguably better than that of ad-supported Hulu as well.
Hulu is controlled by 21st Century Fox, Walt Disney (DIS -0.18%), and NBC of Comcast. Hulu offers many next-day shows from the TV Networks of its owners. Hulu.com is an ad-supported platform, and the subscription version, Hulu Plus, recently crossed 6 million paid subscribers. With two different types of services Hulu is hazier and not as simplified as that of Netflix, and also its content library is not as high in quality or extensive either. Netflix remains far ahead of its rivals, and that is likely to continue.
Total addressable market is on the rise
Netflix is consistently growing its total addressable market not only in the U.S. but worldwide. The company recently rolled out a massive expansion plan in some of the biggest economies in Europe. Netflix is expected to kick off its operations in Germany, France, Switzerland, Austria, Belgium, and Luxembourg in the second half of 2014, and in the process it will grow its addressable market significantly.
In the domestic market, Netflix is well on its way toward hitting its long-term target of 60-90 million subscribers. The company should end the second quarter of 2014 with 36.2 million subscribers based on management's guidance. And the company is getting major tailwinds from the growth of mobile devices and consumer adoption of video streaming over the Internet.
According to Nielsen, 38% of U.S. consumers used Netflix in 2013, a rise from 31% in 2012. And Netflix's customers are increasingly using newer devices to watch their favorite shows on Netflix. Nielsen stated that 23% of Netflix users now use mobile phones for streaming outside of their homes, an increase from only 11% in 2012. With consumers having more choices for streaming devices this makes Netflix more attractive, and will aid in growing its subscriber tally not only in the U.S. but also in its international segment.
Growing library of original and exclusive content
Netflix continues to add a wide range of high-quality shows and documentaries that are available only on Netflix. The company continues to add wide-ranging documentaries -- including political and sports-related ones -- and is green-lighting many new original series not only for adults but also for children.
Netflix struck large content deals with Walt Disney to add first-run exclusive content from Disney's large array of movies and shows starting in 2016. In the interim, Netflix continues to add numerous shows and movies for children from Disney's big catalog of intellectual property which include original shows from Marvel.
Unlike the TV industry, Netflix doesn't release its ratings for its hit original shows. But a decent sense of its customer adoption can be extrapolated from its website. Orange is the New Black has 4.5 million ratings and House of Cards has 3.6 million ratings on Netflix.com. So the company's original content strategy is clearly working and customers are chiming in with very favorable reviews and engaging in word-of-mouth marketing. And this increasingly large content library makes Netflix very attractive in the eyes of consumers.
Earnings growth ahead
Netflix recently hiked its price for new customers by a dollar per month. But it will grandfather in existing customers for a full two years. The price increase will give a small boost to Netflix's revenue in the future and will grow its earnings per share. Analysts expect Netflix to earn $4.16 per share in 2014 with significant growth to $6.94 in 2015.
Stable revenue and cash flows from customers make EPS estimates much more predictable and realistic for Netflix. All of the above-mentioned factors will play instrumental roles in growing the earnings of Netflix, and this will drive strong upside in the stock price.
