Netflix (NFLX) brushes past saturation concerns with strong subscriber growth across all markets

Shares of Netflix Inc. (NASDAQ: NFLX) soared 17% on Wednesday following an upbeat earnings report from the company a day ago. The stock has gained 81% over the past one year. The company reported its fourth quarter and full year 2020 earnings results on Tuesday, surpassing market expectations on revenue and subscriber growth.

EPS fell short of projections but this was overshadowed by the subscriber additions as well as positive news on free cash flow and stock buybacks. Revenues grew 21.5% year-over-year to $6.64 billion but EPS fell 8% to $1.19.

Subscriber growth

During the fourth quarter, global streaming paid memberships rose nearly 22% to 203.66 from last year. Paid net additions for the quarter totaled 8.5 million, surpassing the company’s guidance of 6 million. For the full year of 2020, paid additions were 37 million, reflecting an increase of 31% from 2019.

In 2020, 83% of paid net adds came from outside the US and Canada region. The EMEA region accounted for 41% of paid net adds during the year while the APAC region recorded a year-over-year growth of 65% in paid net additions to 9.3 million.

There were concerns that Netflix has almost reached saturation in the US market but the company continues to see subscriber growth in the region. On its quarterly conference call, Netflix mentioned that it continues to see growth even in some of its more mature markets which is helped by the variety of content it offers. The company continues to see growth in the US and Canada region where it already has roughly 60% penetration.

The fact that Netflix is seeing growth in the US market despite its price hikes last year is encouraging because a higher number of users paying more for the service will boost profits. The company has guided for operating margin of 25% for the first quarter of 2021, which is higher than 14.4% seen in the fourth quarter.

Competition

Despite the encouraging trends in its subscriber base, Netflix is likely to face challenges as competition heats up in the online streaming market. As more players enter the field, the company could face difficulties in adding new subscribers, particularly in the US.

Disney +, which garnered 87 million paid subscribers in its first year, has for long been projected as a formidable opponent to Netflix. Disney + also has a strong foothold in countries like India through its Hotstar service, which accounted for 30% of its total subscriber base. With its strong content base, Disney + has further room to grow in both the domestic and international markets.

Netflix also faces competition from WarnerMedia’s HBO Max, NBCUniversal’s Peacock, AppleTV+, as well as other upcoming services like ViacomCBS’ Paramount + and a streaming service from Discovery. With plenty of choices available, it is likely that users might switch between these streaming services and the resulting churn could create volatility in results.

Content

Amid the rising competition, it is evident that interesting and popular content will always attract customers which makes content investment an important factor. Netflix’s strategy of investing in original content and reducing its dependence on borrowed content has been paying off.

TV shows like The Crown and Bridgerton have proven to be extremely popular. The number of member households that watch The Crown have reached over 100 million since its initial launch. The largest original film of the quarter was George Clooney’s The Midnight Sky and the company estimates 72 million member households will watch this title in its first four weeks.

Netflix currently has over 500 titles that are being readied for launch on its platform and the company plans to release at least one new original film every week in 2021.

Cash flow

Another highlight of the quarterly report was free cash flow and stock buybacks. Netflix believes it is close to being sustainably free cash flow positive. For full-year 2021, the company expects free cash flow to be around breakeven. With a cash balance of $8.2 billion and an undrawn credit facility of $750 million, Netflix does not see the need for external financing. The company will also consider resuming stock buybacks as it did during 2007-2011.

Outlook

For the first quarter of 2021, Netflix expects revenues to grow 23.6% year-over-year to $7.12 billion. Net income is expected to be $1.35 billion, or $2.97 per share. Global streaming paid memberships are expected to grow nearly 15% to around 210 million while paid net additions are estimated to be 6 million.

Click here to read the full transcript of Netflix Q4 2020 earnings conference call