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Can The Success Story of Netflix (NFLX) Continue?

Netflix report their earnings on Wednesday after market closes. Last week, I started looking into Netflix again as there are still a lot of growth potential left there.

In total, Netflix forecasts 2.5 million new subscribers this quarter, including 600,000 in the U.S. and 1.9 million overseas. – Bloomberg

Personally, I have tried both HBO Now ($15/m) and Showtime ($11/month) and I like their service but not enough to switch from Netflix. There are a few reasons, but for me it was their content mix and the lack of technology.

However, one should not ignore these two players as a threat but as long as Netflix is both cheaper ($8-$9/month) and better, they’ll do just fine.

So What About the Growth Story?

I like to look at consumer behavior when I look at expected growth so lets take a look at the search trend for the past 12 months, and just for fun let’s add in HBO and Showtime:

As we can see, Netflix is a giant compared to the other two. Regarding Netflix we’re looking for two things, the trend between April and June which is the quarter Netflix is reporting for, but also the overall trend to see if it’s positive. Except for the abnormal search traffic in January it’s an overall positive trend with continued growth in April-June. As we’re looking for international expansion we should look at the regional interest.

One can clearly see that Australia & New Zealand are increasing sharply. Their combined population is roughly 27.5 million people, so how many subscribers could Netflix get? After 18 months in UK and Ireland they had a 17-18% penetration. That would give a penetration rate of about 1% per month, so 3 months gives us an estimate of 3% that’s 825k new subscribers in that region alone (That’s what the total international growth was Q1 2014).

Downloads Are King

Finally, I like to look at App downloads and reviews to see what’s going on:

In the US, Netflix has been the top 10-20 app since May and in Australia it’s a little bit more volatile in the downloads but still top 30ish.
I like to look at number of reviews and the number of bad reviews, because this gives me an estimate of the growth rate of downloads but also the churn rate of dissatisfied customers. In general the number of downloads has increased but so there is also an increase in 1 star ratings which is a sign of discontent customers.

By looking at the search queries and app downloads I’m confident that Netflix will hit it’s number of 2.5 million new subscribers.

One thing that I have noticed is that the market has already started taking this growth in to consideration with the stock rising more than 8% since I did this research. This screenshot is from Thursday:

Screen Shot 2015-07-08 at 1.25.54 PM
But if you look at Adobe’s and SalesForce revenue multiples I believe that Netflix can hit $750 if they beat their subscriber estimates.

Let me know what you guys think! I’m available 24/7 on SprinkleBit.

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Alexander Wallin is an experienced investor and Fintech expert. He has a passion for startups and making the financial markets more accessible to retail investors. Be sure to follow him on SprinkleBit!

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