With Netflix (NFLX 0.10%) stock soaring 77% in the past 12 months and shares hitting new highs after each of the past three quarterly earnings reports, some investors are probably wondering whether all the company's growth is already priced into the stock. Trading with such a forward-looking valuation, it's as important as ever to understand Netflix's underlying drivers for ongoing growth. Fortunately, management recently discussed some of these drivers in the company's second-quarter earnings call. Here are three of the catalysts driving growth at Netflix.
Image source: Netflix.
Original content driving subs
Netflix's aggressive foray into original content was initially viewed skeptically by many. But almost all negativity toward the initiative has vanished. In hindsight, the company's choice to grow its library of original content marks the clear catalyst that turned Netflix into a mainstream media company.
Unsurprisingly, when asked why Netflix was able to significantly outperform its guidance for 600,000 net subscriber adds during Q2 with 900,000 net new subscribers instead, Netflix CFO David Wells was able to answer with certainty:
We think it's content. It's the building momentum of our original content. It's hard to isolate it specifically to that, but given that we've grown at about 600,000 subscribers for the past two years. And this year we're up to 900,000 in Q2, which seasonally is usually a weak quarter for us relative to Q1 and Q3 and Q4. We just had a really strong slate, and I think it showed through in our results, both US and international.
Image source: Netflix.
Going forward, Netflix chief content officer Ted Sarandos said the company believes original content will continue to work well for the company as a driver for subscriber growth.
We have two things that are working for us. One, we're launching new shows that have become great brands on their own. But also as these shows grow into their second and third and fourth seasons, they're actually more attractive on their own. So we're adding more breadth of content, more original series, and those series have become bigger and bigger brands that down the road will become subscriber events as they grow.
Price increases
The value Netflix is providing subscribers has arguably grown faster than its prices for membership. This leaves the company in the fortunate position of having a long runway for future price increases -- and Netflix plans to take advantage of this opportunity.
"Over the last year, we've raised [average selling prices] about 5%," Netflix CEO Reed Hastings said during the call. "We'd like to keep that moving."
But investors will have to be patient. The company plans to be careful that value grows in line with prices, Hastings explained.
So we're going to continue to have incentives for people to move up in the plans as suits their usage pattern, but we want to take it very slow. Things are going well, there's no reason to be disruptive. We're not planning anything in the US this quarter. It's really focused on going very steady, very slow. And over the next decade, I think we will be able to have more and more content and add more value, and then to be able to price that appropriately.
International bonanza
International markets are a huge opportunity for Netflix. The significance of the opportunity in these markets is clear by looking at Netflix' 48% international revenue growth, year over year, during Q2.
And opportunity internationally for Netflix remains incredibly robust going forward. Consider the company's plans for international expansion during the rest of 2015. Netflix is launching in Japan during Q3 and Spain, Portugal, and Italy during Q4, Hastings said during the second-quarter call. Looking out further, Netflix has its sights on a China launch in 2016.
While Netflix still has a negative contribution margin in international markets as it spends heavily on initial expansion in new markets, the company said in its second-quarter letter to shareholders that its "first set of international markets" has already achieved contribution profitability. In the next few years, Netflix's highly scalable business model will likely help it to achieve contribution profitability in many of its international markets. And, over the longer term, its international markets segment will likely contribute substantially to the bottom line.
While Netflix's pricey valuation today may make it difficult to justify buying the stock, there are plenty of reasons for current shareholders to keep holding. With key catalysts for more revenue growth and a history of excellent execution, the company looks poised to deliver substantial bottom-line growth over the long haul.
