Why Netflix’s Global Subscriber Count Could Still Triple

The Netflix menu featuring Stranger Things

Coming off if its biggest quarterly subscriber growth ever, Netflix (NASDAQ: NFLX) is showing no signs of slowing down.

The company is investing more money in content and marketing as it bets on the continued growth of its platform. In the fourth quarter, it added 8.3 million members, giving it a total of 117 million, but there are signs that Netflix is reaching maturity in the U.S. — its domestic growth peaked in 2013, and the company will soon reach the bottom end of its target long-term range of U.S. subscribership at 60 million to 90 million. Investors may be wondering how many subscribers Netflix can attract around the globe.

Even with its total subscriber count having already topped 100 million, there’s a good reason to believe that the streamer’s subscribership could one day reach 400 million, more than triple what it has today. Let’s take a closer look.

The domestic goal is clear

In Netflix’s Long-Term View statement, the company says it believes it can reach 60 million to 90 million members, “based upon our trajectory to date and the continued growth of internet entertainment.” Considering there are now 126 million households in the U.S. and that figure is growing by about 1 million per year, Netflix, with 55 million U.S. subscribers, still has ample opportunity to add new ones at home. According to estimates from Morningstar, 79 million U.S. households have subscribed to Amazon Prime, and in its heyday more than 100 million households paid for cable or satellite TV, so the appetite for Netflix’s product is clear as long as it can continue delivering value for its subscribers.

At this point, it almost seems certain that Netflix will reach 60 million U.S. subscribers, but with the increasing popularity of Internet TV and Netflix’s increasing spending on content and marketing, it wouldn’t be surprising to see the company eventually reach 80 million or even 90 million members at home. Recently, Netflix has been adding about 5 million U.S. subscribers a year, so it could reach 80 or 90 million in another five to 10 years.

International is the big opportunity

Netflix’s international subscriber base surpassed its domestic one last year, and it continues to grow much faster. The company added 18.5 million international subscribers in 2017 and sees that growth accelerating at least into the first quarter. Management has said that the international markets it first entered like western Europe, Canada, and Latin America are beginning to deliver solid contribution profits, while growth has been more difficult in Asia. Considering that more than half of the world’s population lives in Asia, there should be considerable international growth ahead if its product can catch on in Asian countries, where it launched only two years ago.

For comparison, some of Netflix’s peers have found a much larger user base outside of the U.S. than within it. Alphabet’s (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube draws more than 80% of its viewership from outside the U.S., and the video-sharing site now claims 1.5 monthly billion users. Facebook’s (NASDAQ: FB) properties similarly skew toward an international audience. At Facebook, roughly 90% of its monthly users come from outside North America, and the share of international users Instagram claims is now above 75%.

Twitter has a similar breakdown, with about 80% of its users coming from abroad.

There are some key differences between Netflix and those social media sites. Importantly, they are all free, while Netflix charges subscribers about $11/month. Most of Netflix’s content is also in English, so it may not have the international appeal of user-driven content that sites like Facebook and YouTube do.

The global box office may offer a better proxy. Last year, all but one of the top 25 movies (Wonder Woman) drew more box office revenue overseas than domestically, and international markets contributed 68% of box office revenue for the top 25 movies last year. The international share of theater revenue is also growing; China’s box office is now bigger than the U.S.’. Considering that Netflix is cheaper than an evening out at the movies, the company’s share of international revenue should eventually eclipse that of the box office.

Therefore, it seems reasonable to expect the streamer to eventually generate at least 70% of its revenue from overseas, though its ability to enter China will have some impact on that. If the company can reach 80 million subscribers domestically, a 70% share abroad would translate into 190 million international subscribers, or 270 million total. If Netflix reached the high end of its domestic subscriber at 90 million and it brought in 75% of it subscribers from abroad, that would mean a total of 360 million members, more than triple its count today.

Whether Netflix can achieve that will depend on its ability to produce content that appeals to international audiences and persuade new members to join its service, but the accelerating international growth should give investors confidence in the company’s ability to do that. With its negative free cash flow, content spending may be a concern for some investors, but with Netflix just beginning to penetrate foreign markets, long-term user growth should not be. It’s one big reason to bet on the streamer’s continued success.

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