Netflix, which delivered the best return of any stock in the SandP 500 last year, has ambitious plans for this year so it can produce something new next year: serious profits.
Investors have been fine with very little of those because chief executive officer Reed Hastings has said things would change after the company completed its global expansion. That’s supposed to happen in 2016, with the introduction of the online video service to more than 100 new markets, including China, India and Indonesia. At the same time, Netflix will spend about $5 billion on programming, more than twice as much as HBO’s estimated budget, and double its production of original series. If all goes as planned, Wall Street expects net income could soar to more than $500 million in 2017. The popularity of the home-grown content -- Netflix builds its can’t-get-it-anywhere-else pitches around shows like “Making a Murderer” and “Jessica Jones” -- will be key to Hastings making good on the profits pledge.
Netflix has to lure enough new customers to pay for it all, and record the kind of gains that’ll persuade doubters the CEO’s vision for the first worldwide online TV network can pan out. “A lot of challenges await them, one of which is the amount of money they’ve earmarked for content production. It’s startling,” said Paul Verna, an analyst with eMarketer Inc. The international rollout this year is “a huge potential windfall -- but it’s a gamble.” Hastings may reveal details during the International Consumer Electronics Show in Las Vegas, where he’s scheduled to give a keynote speech on Wednesday.
Netflix is already in more than 60 countries after launching in Japan, Australia and Southern Europe last year. It hasn’t confirmed subscriber numbers but projected in October that it would add about 6 million domestically and 11 million outside the US in 2015, reaching 74.3 million total. Profits, though, have been relatively slim since it went public almost 14 years ago. This year, net income will be $137 million, the average of estimates compiled by Bloomberg. From there, Wall Street projects it could climb to $535 million in 2017 and surpass $1 billion by 2018 -- if the expansion works as planned. Spending is definitely on the rise; the company will devote eight times what CBS Corp.’s Showtime will on entertainment content this year, according to data from the research firm MoffettNathanson LLC.
Netflix was the top performer in the Standard and Poor’s 500 Index last year, gaining 134 per cent, compared with the benchmark’s loss of 0.7 per cent. On Monday, Netflix fell 3.9 per cent to close at $109.96 in New York amid a global rout in the markets and a downgrade from Robert W. Baird and Co.
Netflix is at its most efficient when its money is devoted to its own series, films, stand-up comedy shows and more, chief content officer Ted Sarandos said at an investor conference in December. The service will in 2016 debut its first talk show, a movie starring Brad Pitt, reboots of bygone hits “Full House” and “Degrassi” and the first offerings in French and Italian. It also has exclusive rights to releases from Walt Disney Co. starting this year. New programs will join blockbusters including “House of Cards” and “Orange Is the New Black.” To cover the costs, Netflix will have to not only attract more customers but keep raising prices, said Anthony DiClemente, an analyst with Nomura Securities International Inc. who recommends buying the stock.
Netflix increased them up for new customers in the US and Europe last year. Monthly plans in the US range from $7.99 to $11.99. Hastings has hinted at hikes, saying the company will “be able to ask consumers for more” so it can keep investing in the original products they like. Global subscribers could grow to 150 million by 2020, according to DiClemente’s forecasts, with revenue growing at an annual rate of 24 per cent to almost $20 billion.
