Will Netflix Continue To Deliver Such Stellar Results?

Netflix (Nasdaq: NFLX) is on a roll. Earlier this week, it reported its fourth quarter results that shattered all market expectations. If there was ever a doubt about slowing subscriber growth, Netflix has put all of those to rest in these results.

Netflix’s Financials

Netflix’s Q4 revenues grew 40% over the year to $3.29 billion, ahead of the Street’s forecast of $2.48 billion for the quarter. The stellar performance was attributed to continued interest of the users in its content. During the year, Netflix saw average streaming hours per membership increase by 9% over the year. EPS of $0.41 was in line with the market’s projections for the quarter.

Netflix continued to surprise the market with phenomenal subscriber growth. During the quarter, it added 8.33 million total subscribers, compared with its target growth of 6.3 million subscribers. It added 1.98 million new domestic streaming subscribers and 6.36 million international subscribers in the quarter. Earlier, it had forecast an addition of 1.25 million in the US market and 5.05 million in the international market. The market was looking for a growth of 1.29 million domestic subscribers and 5.05 million international subscribers. The net growth in domestic subscribers comes despite the $1 increase in prices for grandfathered subscriptions. A few years ago, when Netflix had tried a similar move, it had witnessed a terrible backlash.

Netflix ended the year with revenues of $11.7 billion, compared with $8.8 billion reported a year ago. EPS of $1.23 has also grown significantly over $0.43 recorded last year. At the end of the year, Netflix had 117.58 million streaming subscribers worldwide, including 54.75 million in the US market.

For the current quarter, Netflix is predicting a growth of 6.35 million to the subscriber base with 1.45 million in the US and 4.9 million in other countries. It expects to record revenues of $3.69 billion with an EPS of $0.63. Analysts were forecasting revenues of $3.52 billion with an EPS of $0.57.

Netflix’s Content Growth

Netflix’s success story has been driven by its content. During the year, it added several new seasons and series including hit original shows like  Crown, Stranger Things, 13 Reasons Why, Marvel’s The Punisher and Mindhunter along with a fantasy action movie Bright, and a German series Dark. It continues to remain focused on making more of such content.

Additionally, Netflix is focusing on creating content for mobile devices. It is developing mobile friendly video clips that will be 15 minutes long and will feature stand-up comedians including new comers and some established names like Michelle Buteau, Sam Jay, Tim Dillon, and Josh Johnson. The series will be filmed in front of a live studio audience and will be released throughout the year.

But all of this will come at a cost. In the current year, Netflix is planning to spend $7.5-$8 billion on content, along with another $2 billion on marketing efforts. The rising costs continue to bother analysts as Netflix plans to borrow more funds to finance this content. During the quarter, it reported a negative cash flow of $524 million, better than the negative $639 million reported a year ago.

For now, though, the stock market is very pleased with Netflix’s performance. Soon after the results announcement, the stock touched a record high of $246.50, a gain of 10% that helped it cross the $100 billion market capitalization milestone. Its stock has climbed steadily from the 52-week low of $137.03 at the start of 2017.

The question, of course, is whether Netflix can continue growing and continue delivering a fast accelerating market cap. The international market opportunity, it appears, is quite large and offers lots of headroom still. And Netflix is building a superb portfolio of original content that will continue to be in high demand across geographies.

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