For the third quarter, Netflix, Inc. (NASDAQ:NFLX) posted strong results with an increase in all significant financial numbers including subscriber additions, revenue and contribution profit. According to JP Morgan analysts (Doug Anmuth, Kaizad Gotla, Bo Nam and Diana R Kluger), as Netflix reinvests EPS into new international markets, this will help the company to expand its subscriber base in the coming years.
Analysts believe “overall trajectory of net adds remains strong” and “positive network effects of better content and more subscribers continues to play out, as Netflix disrupts linear TV.”
International expansion to fuel growth
The streaming company fueled its international expansion by gaining traction in the Nordics and Netherlands, along with progression in the existing market and a surge in low quality free trials in September in Latin America. For the fourth quarter, paid net ads are expected to increase at 1.3 million at the midpoint compared to 1.1 million in the third quarter. International contribution losses were less than the expectations of analysts and came in at $74.3 million compared to analysts’ expectations of $84.0 million. There was flat to sequential upside in the international market that counterbalanced initial costs related to the Netherlands launch.
Speeding up amortization
Netflix, Inc. (NASDAQ:NFLX) domestic streaming subs and revenue along with contribution revenue was in line with analysts’ expectations of $167 million. The numbers look impressive considering an incremental $27 million in content amortization for its originals is weighing on the financials from quarters.
The content streaming company is speeding up amortization of its original content as it is experiencing that the shows were watched in greater numbers in the early month of the launch. Netflix amortized original content expenses on a straight line basis prior to this. Also, the company is expecting the streaming margin to decline 50 basis points in the fourth quarter at the midpoint supported by increased amortization and increment in sales and marketing. The company is targeting at margin expansion by 400 bps year on year on a quarterly basis, and is hopeful that the trend will continue if it achieves 6 million domestic streaming subs annually, in the future.
Netflix a threat to parallel TV market
Netflix is giving a stiff challenge to the parallel TV market, and is a step ahead through its strong subscriber growth and content differentiation. Growing popularity of internet connected devices and customer inclination towards on-video demand over the internet TV compared to Linear TV is taking Netflix to new highs.
For 2015, analysts are estimating revenue to increase 6% and EBITDA to surge 22% on the back of Netflix, Inc. (NASDAQ:NFLX) leveraging fixed content cost commitments over a larger subscriber base. Also, Netflix will expand into different geographies as it holds strong position in the United States, and is posting better results in foreign markets, as well.
JP Morgan analysts have assigned Overweight rating to Netflix with a price target of $460.00.
