Netflix Subscriber Growth 2x Expectations; Good News Or Peak?
Netflix (NASDAQ: NFLX) released its Q1 2020 earnings report after the market close on April 21, 2020. The streaming content giant’s stock had soared ahead of earnings as investors anticipated an excellent quarter fueled by consumers forced to stay at home amidst the ongoing COVID-19 lockdown. Netflix delivered first quarter global net subscriber additions of almost 15.8 million, as against the company’s own guidance of about 7 million new subscribers and almost 2x the Wall Street consensus of a little less than 8 million. However, this is likely to be a one-time bonanza as the management has hinted at subdued growth over the next few quarters. The mind-boggling subscriber addition couldn’t translate into a sharp rise in revenue, which came in at $5.77 billion in Q1 2020, just ahead of $5.76 billion estimated, mainly because 85% of the subscriber addition was in the international streaming division, the revenue of which was adversely affected by a stronger dollar. We believe Netflix is unlikely to see such a sharp rise in subscriber count anytime in the near future.
In our interactive dashboard analysis Netflix Revenues: How Does NFLX Make Money? we discuss Netflix’s business model, followed by sections that review past performance and 2020 expectations for the company’s revenue drivers, and competitive comparisons with Disney and AT&T.
Company Overview and General Reference
- Netflix is a streaming service which runs TV series, documentaries, and feature films across a wide variety of genres and languages. It caters to subscribers in the US (domestic streaming) and over 190 other countries (international streaming).
- The international streaming division’s size is roughly 53% of Netflix’s total revenue as of 2019, compared to 46% for the domestic streaming segment.
- International streaming division’s revenue growth has been key to Netflix’s stock price appreciation from $125 at the beginning of 2017 to $425 currently, reflecting a whopping 240% rise, further helped by improving margins.
Overview of Company Revenues
Netflix reported $20.2 billion in total revenues for full-year 2019. This includes 3 operating segments:
- International Streaming: $10.6 billion in FY2019 (53% of total revenues). Derives revenues from monthly membership fees for services related to streaming content to members outside of the U.S. in more than 190 countries.
- Domestic Streaming: $9.2 billion (46% of total revenues). Derives revenues from monthly membership fees for services related to streaming content to members in the U.S.
- DVD: $297 million (1% of total revenues). Derives revenues from monthly membership fees for services consisting solely of DVD-by-mail.
Our interactive dashboard highlights how revenue trend in Netflix’s Revenues compare with that of Disney and AT&T
International Streaming to be the Driving Force
- Revenue from international streaming division has increased by about 108% in the last two years, from $5.1 billion in 2017 to $10.6 billion in 2019.
- Over the next two years, the division revenue is projected to grow by 57% to $16.6 billion by 2021.
- This is likely to be higher than the projected growth of 42% in Netflix’s total revenue over the next two years.
- Higher revenues are likely to be driven by 42% projected growth in subscriber base, led by deeper penetration in relatively untapped markets, along with 11% rise in fee per subscriber.
- With the US market being somewhat saturated with increased competition from existing and new players in the streaming business, Netflix is expected to widen its footprint in the overseas market.
- Over 85% of the net subscriber addition of 15.8 million in Q1 2020 came from the company’s international streaming segment.
- International streaming revenue contributed 53% of total revenue in 2019. The share is expected to go up to 55% in 2020.
Our interactive dashboard on Netflix Revenues explains how Netflix’s domestic streaming division has performed historically along with the outlook for 2020 and 2021.
Is There Good News Ahead?
- Spread of coronavirus and the resultant lockdown has helped streaming giants such as Netflix. The subscriber addition in Q1 2020 is a one-time event and is unlikely to be replicated anytime soon. Despite such a sharp rise in subscribers, revenue for the quarter could hardly beat market consensus, mainly due to international streaming revenue growth being significantly affected by a strong dollar during this crisis.
- In fact, the next few quarters will see subdued subscriber and revenue growth for Netflix. Additionally, increasing competition from existing giants such as Amazon and new players such as Disney, Apple, Comcast, and AT&T could eat into Netflix’s market share. The biggest threat could be from the exceptionally good response Disney+ has gotten in the last few months which is expected to help Disney to increase share of streaming in its revenue mix going forward
- Though Netflix’s revenue in 2020 is expected to grow by 21% to $24.3 billion from $20.2 billion in 2019 led by strong international streaming growth, this is very low compared to the subscriber addition seen in Q1 2020, which we believe is the peak for the company.
- This led to a drop in stock price post the earnings announcement.
Trefis estimates Netflix’s stock to have a fair value of $385, which is roughly 9.4% lower than the current market price of $425. Our price estimate takes into account numbers from Netflix’s earnings release for Q1 2020.
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