What's going on?
Netflix reported its earnings and the stock soared – it was up more than 11% on Tuesday!
What does this mean?
Its profits were higher than expected, but the big news was its strong international subscriber growth. At the CES this month, Netflix announced its availability everywhere in the world except China. That increased its “addressable market” (a.k.a. the number of homes that could subscribe to Netflix) by 50%. Note: that’s a huge increase in the size of its potential market! Netflix has, essentially, already successfully saturated the US market and now it’s trying to do the same in the rest of the world.
Why should I care?
The bigger picture: This might be good news for some of last year’s other big winners, like Facebook, Amazon and Google. After a stellar 2015, these stocks have had a tough start to the year (since December 31st: FB -9%, GOOG -7.5%, AMZN -15%). As investors wait for these companies to report earnings, Netflix might serve as a reminder that strong growth can still translate into big stock gains.
For the stock: Netflix is a very “rich” stock. That means its stock price is at a very high multiple relative to its profits. Investors are betting that its impressive growth will continue: there are big areas of potential growth even beyond the announced international expansion (which excludes China). The company will likely enter China at some point in the next year or so. Moreover, it is well positioned to benefit from the next big thing in TV: Ultra High Definition (for which it will charge subscribers a higher fee). The hope is that it will eventually be able to use its scale to generate big profits, thereby justifying today’s high valuation. However, there are also concerns, like increased competition (including from traditional networks, e.g. CBS All Access) and the high costs associated with producing its original programming.