Why Netflix Doesn’t Have to Worry About Slower Domestic Growth

Netflix, Inc. (NASDAQ: NFLX) reported its fourth quarter financial results after the markets closed on Tuesday. The company had $0.07 in earnings per share (EPS) on $1.82 billion in revenue compared to consensus estimates from Thomson Reuters that call for $0.02 in EPS on $1.83 billion in revenue. The same period from the previous year had $0.10 in EPS on $1.48 billion in revenue.

During the quarter the company added a record 5.59 million members helping to grow memberships to a grand total of 74.76 million. Of these net adds, 4 million were international.

In terms of guidance, Netflix expects to have $0.03 in EPS on $1.81 billion in revenue in the first quarter of 2016, as well as net additions of 6.1 million customers which would make total memberships 80.86 million. The consensus estimates call for $0.02 in EPS on $1.98 billion in revenue

Netflix’s original programming dominated IMDB’s Top 10 New TV shows of 2015, taking six of the spots. The company plans to launch over 600 hours of original programming in 2016 compared to 450 hours in 2015. Ultimately the company is looking to spend about $6 billion on content in the new year.

Although there was some weakness in domestic growth, many consider this secondary to the international expansion that is taking place because the U.S. market is already thoroughly saturated. Domestic revenue only grew about 4% compared to over 9% internationally, on a sequential basis.

The company is poised to explode with its international segment now practically worldwide.

Reed Hastings, CEO of Netflix, commented:

In early January at CES, we announced the availability of Netflix everywhere in the world except China. Pricing is comparable to our existing plans and we have added support for Korean, Arabic, and Simplified & Traditional Chinese languages. Our move into 130 additional countries broadens our addressable market by 190 million broadband homes, on top of the 360 million we counted at the end of 2015. While the opportunity is large, our growth in these new markets will unfold over many years as we improve our service. We are starting by primarily targeting outward‐looking, affluent consumers with international credit cards and smartphones. As with every market we’ve launched, our approach is to listen, learn and improve rapidly, adding more content, additional languages and a better Netflix experience over time. Our global availability sets us up for continued growth for many years and we continue to expect material global profits beginning in 2017.

For the fourth quarter the company had negative free cash flow of $276 million. On the books cash and cash equivalents totaled $2.3 billion at the end of the quarter as well.

Shares of Netflix closed Tuesday up 3.7% at $107.88, with a consensus analyst price target of $123.78 and a 52-week trading range of $47.71 to $133.27. Following the release of the earnings report the stock was initially up 10% at $119.01 in the after-hours trading session on Tuesday.