Netflix has come up against a brick wall where China is concerned, meaning that the country with a total addressable market of 1.4 billion people remains off limits despite its best efforts. However, the company seems to have found so much success almost everywhere else that this isn’t a big deal. It had a nice gift for investors last night in the form of its third quarter earnings report as it returned to smashing Wall Street’s estimates after a weak second quarter.
Netflix admits near-defeat in China
Netflix said in its letter to shareholders last night that the market in China has proven to be a tough nut to crack. The company had high hopes for the huge market along with the rest of the world, but it said that China’s “regulatory environment for foreign digital content services” had become “challenging.” Instead of launching its own services into China, Netflix will simply license its original content to Chinese companies. It doesn’t expect much revenue from the licensing revenue, however.
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The company launched in its first Asian market a little over a year ago, beginning with Japan. Chief Executive Reed Hastings said at the time that they were working on launching the service in every Asian country in 2016, which included China. Hastings had designs on the entire world, and in January, the company expanded into more than 100 additional countries. However, China, North Korea and a number of other countries continue to be out of Netflix’s reach.
Netflix not alone in being blocked in China
The company explained in January that it needs the Chinese government’s permission to launch there and that the process is quite lengthy. However, it viewed China as being a likely market at some point, as Hastings named Apple and Walt Disney as companies that had managed to fin success there. Chinese regulators have tamped down access to the market again though by shutting down Apple’s iBooks Store and iTunes Movie library there. DisneyLife also had its access to the Chinese market revoked.
Netflix insists that if or when Chinese regulators grant access, it will be ready.
Netflix earns a slew of price target increases
The company said last night that it added almost 3.6 million new subscribers during the third quarter, including 370,000 U.S. subscribers and 3.2 million international subscribers, so clearly markets other than China have presented big opportunities. Management had guided for approximately 2.3 million net ads, including 2 million international subscribers and 300,000 domestic subscribers.
Netflix reported that its new original series Stranger Things, Luke Cage and The Get Down did well during the third quarter, helping pull in new subscribers and limit the churn rate. The second season of Narcos helped also.
The company earned a long list of price target increases following last night’s earnings report. Even some of the most bearish analysts raised their targets, although they were not convinced of the company’s success even after last night’s report. Wedbush Securities moved its target from $50 to $60, while Pivotal Research upped its target from $125 to $155. Pacific Crest analysts raised their target from $125 to $135, and Stifel analysts upped their target from $130 to $150. SunTrust Robinson Humphrey analysts raised their target $15 to $115 per share, while JPMorgan moved from $122 to $140 per share. Nomura analysts increased their target by $20 to $130 per share.
Shares of Netflix skyrocketed 19% to as high as $119.82 during regular trading hours on Tuesday.