There seems to be no end in sight for Netflix growth and a number of investors have finally realized what we at Faultline Online Reporter have known for some years, and piled back into the stock, putting it within a dollar of its all-time high, which it reached this time last year. The market capitalization values Netflix at around $57 billion, no longer a force that any broadcaster or pay TV operator can ignore.
After adding some 19 million additions during the past year, it still believes there remains upside not only in international markets, but in the US, where it all started, and its shareholder letter forecast next quarter at $2.5 billion in revenues, putting it on a $10 billion run rate, compared to the $8.3 billion it did this year.
Net income was just $67 million, but as Netflix is fond of telling us, it is on a growth curve and high margins will come later. It warned that over the next decade internet TV will supplant linear TV, and it will strive to remain a leader within it.
Looking at how TV first developed in the US, that market managed to support 6 very large studios, and 4 national broadcast networks, all with global influence – in the online world we should expect no less and now each of the players in the US has to think about a globalization strategy built around direct to consumer online relationships rather than purely partnering with local broadcasters, and try to carve their name on one of the few online leadership positions left.
In Q4, Netflix global streaming revenue grew 41% year on year to $2.4 billion, and contribution rose to $470 million, 20% margin. The company had forecast just $56 million of net income and smashed it at $67 million despite a $22 million foreign exchange downward adjustment It added 7.05 million net new members globally against a plan of 5.2 million and last year’s Q4 performance of 5.59 million, the largest quarter of net additions in its history.
This performance and the valuation that comes with it now puts Netflix outside of any attempt to acquire it by US studios such as Disney. There are companies big enough to buy it, but if they do not move within a year, then Netflix will start to have the kind of momentum where it will start being considered an acquirer rather than M&A prey.
The last remaining doubt about Netflix is its margin, and now it says during 2017 it will shift from a 4% margin to around 7% for the full year. That will drive its value higher still and eventually it will begin to accumulate cash. Right now, it only holds $1.7 billion in ready money, and the most it has held is $2.7 billion 18 months ago. It also holds $3.3 billion in long term debt. Netflix still expects to use up $2 billion in cash over the coming year, so expect that debt to go higher. But as Netflix performs better, it’s debt costs it less and in October it raised $1 billion at 4.375%, which reduced its average cost of capital. As we said ten years ago when it launched this service – this one will run and run.