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Will Netflix Inc's Growth Peak in 2016?

By Jeremy Bowman - Jan 23, 2016 at 9:25AM

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The streamer's subscriber growth may finally be hitting a ceiling.

There's a key question for Netflix Inc (NFLX -0.42%) and its investors to answer this year. 

Since it launched its streaming service, Netflix has added more subscribers in each year than it has the previous one, and its international expansion has been a major reason why. As the company expands to new territories, it grows its addressable market -- but it completed its international expansion earlier this month. Will subscriber growth now begin to decelerate?

Following its fourth-quarter report earlier this week, the stock initially popped, but then fell as the market seemed disappointed by slowing domestic subscriber growth. In the U.S., Netflix added 1.56 million members, down from 1.9 million in the quarter a year ago. With the about half of all broadband households in the country already subscribing to the service, management acknowledged that domestic growth may become more difficult. 

Source: Netflix 10-K 

As you can see from the chart above, Netflix's domestic subscriber growth has been relatively consistent. It peaked in 2013, but now appears to be on the decline as it fell in each of the past two quarters and is forecasted to drop again this quarter. Based on those three quarters, Netflix seems to be expecting domestic subscriber growth to fall by close to 20% this year, meaning it could drop below 5 million additions for the first time since it split the streaming service from its DVD-by-mail partner in 2011.

It's important to remember that market penetration isn't the only factor affecting Netflix's growth. It will also be determined by the quality of its original programming, competitor moves, and other elements. But it's clear that the company can't grow by 6 million domestic members a year forever.

Outside the U.S., it's a different story. International member additions passed domestic ones in 2014, and it's likely to stay that way for a long time. As you can see from the chart below, international subscriber growth has accelerated each year since Netflix first expanded abroad, moving into Canada in 2010. 

The company's international subscriber growth has exploded almost every year since its inception, and it's poised to do so again in 2016, with the streamer projecting record additions of 4.35 million in the first quarter. Netflix does not provide full-year guidance, but 15 million new international subscribers in 2016, if not more, would be a reasonable expectation.

Measuring future growth 
Netflix doesn't break out growth in international markets by country, so it's hard to make an accurate assessment of future international growth. In Canada, it was able to add about 1 million in each of the first three years of availability, growing at a faster per-capita pace than it has been in the U.S. In the UK, it doubled its market penetration in its second year, reaching 3 million subscribers in little more than two years.

However, penetrating developing countries could take longer as the middle class is still growing and people are still gaining access to broadband Internet. What's clear from Netflix's track record in the U.S. and mature international markets is that the rate of growth should be solid for at least a few years before decelerating. Again, other factors will weigh, such as the price and local appeal of programming, but the opportunity abroad is huge.

By comparison, Time Warner (TWX)-owned rival HBO has about 30 million subscribers domestically but another 90 million more abroad. Based on that math, Netflix could eventually have 150 million international subscribers, if not more.

Now that Netflix is done collecting passport stamps, 2016 will probably be the last year of dramatic acceleration in international subscriber additions. But rather than a growth peak, I'd expect more of a growth plateau as the company should be able to add about 20 million more members a year for the next few years, moving into China notwithstanding.

As subscriber growth plateaus, the company's focus must shift from driving growth to driving profits.

 

Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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