Netflix’s growth script: Spend now to make money later
Company projected 6m additional subscribers in the US and 11m outside in 2015
Netflix Inc., which delivered the best return of any stock in the S&P 500 last year, has ambitious plans for this year so it can produce something new next year: serious profits.
Investors have been fine with very little of those because Chief Executive Officer Reed Hastings has said things would change after the company completed its global expansion. That’s supposed to happen in 2016, with the introduction of the online video service to more than 100 new markets, including China, India and Indonesia. At the same time, Netflix will spend about $5 billion (Dh18.36 billion) on programming, more than twice as much as HBO’s estimated budget, and double its production of original series. If all goes as planned, Wall Street expects net income could soar to more than $500 million in 2017.
The popularity of the homegrown content - Netflix builds its can’t-get-it-anywhere-else pitches around shows like Making a Murderer and Jessica Jones - will be key to Hastings making good on the profits pledge. Netflix has to lure enough new customers to pay for it all, and record the kind of gains that’ll persuade doubters the CEO’s vision for the first worldwide online TV network can pan out.
“A lot of challenges await them, one of which is the amount of money they’ve earmarked for content production. It’s startling,” said Paul Verna, an analyst with eMarketer Inc. The international rollout this year is “a huge potential windfall - but it’s a gamble.”
Hastings may reveal details during the International Consumer Electronics Show in Las Vegas, where he’s scheduled to give a keynote speech today. Netflix is already in more than 60 countries after launching in Japan, Australia and Southern Europe last year. It hasn’t confirmed subscriber numbers but projected in October that it would add about 6 million domestically and 11 million outside the US in 2015, reaching 74.3 million total.
Slim profits
Profits, though, have been relatively slim since it went public almost 14 years ago. This year, net income will be $137 million, the average of estimates compiled by Bloomberg. From there, Wall Street projects it could climb to $535 million in 2017 and surpass $1 billion by 2018 - if the expansion works as planned.
Spending is definitely on the rise; the company will devote eight times what CBS Corp.’s Showtime will on entertainment content this year, according to data from the research firm MoffettNathanson.
Netflix was the top performer in the Standard & Poor’s 500 Index last year, gaining 134 per cent, compared with the benchmark’s loss of 0.7 per cent. On Monday, Netflix fell 3.9 per cent to close at $109.96 in New York amid a global rout in the markets and a downgrade from Robert W. Baird & Co.
“International subscriber growth is what’s holding the valuation up,” said Laura Martin, an analyst with Needham & Co. who recommends buying the stock. The trick, she said, will be to keep adding customers at a steady enough clip to foot all the bills.
Cost challenge
Most of the Netflix budget has in the past gone to buying older movies and shows, but the original-versus-imports balance is starting to shift. Netflix is at its most efficient when its money is devoted to its own series, films, stand-up comedy shows and more, Chief Content Officer Ted Sarandos said at an investor conference in December.
The service will in 2016 debut its first talk show, a movie starring Brad Pitt, reboots of bygone hits and
and the first offerings in French and Italian. It also has exclusive rights to releases from Walt Disney Co. starting this year. New programmes will join blockbusters including House of Cards and Orange Is the New Black.
To cover the costs, Netflix will have to not only attract more customers but keep raising prices, said Anthony DiClemente, an analyst with Nomura Securities International Inc. who recommends buying the stock. Netflix increased them up for new customers in the US and Europe last year. Monthly plans in the US range from $7.99 to $11.99. Hastings has hinted at hikes, saying the company will “be able to ask consumers for more” so it can keep investing in the original products they like.
Global subscribers could grow to 150 million by 2020, according to DiClemente’s forecasts, with revenue growing at an annual rate of 24 per cent to almost $20 billion.
Netflix can’t hit those numbers without a successful expansion in Asia. The wild card is China, where the government requires foreign media ventures have local partners. Many potential allies already have competing businesses. Alibaba Group Holding Ltd. recently acquired full control of Youku Tudou, one of the largest video streaming services in China, while Baidu Inc. and Tencent Holdings Ltd. own popular video services.
Hastings has described the China effort as “still in the early stages” without providing details. With a growing middleclass and a movie market that’s the second-largest by box-office receipts, the country is key.
“Driving home China is big for their share price,” said Vivek Couto, executive director of Media Partners Asia, a consulting firm. “They are trying to crack China seriously.”
Netflix’s income projection for 2017, as per Wall Street.