Two things are clear about Netflix’s future: its major growth opportunities lie outside North America, and it believes original content is the key to attracting a bigger audience while still turning a profit. Today the company released its earnings report for the fourth quarter of 2016, and the financials highlighted both of these key trends.
The company added 7.04 million subscribers in the fourth quarter, a new record, and far more than the 5.59 it added during the same period last year. The vast majority of that came from international growth, which amounted for 5.12 million of those new members. Total revenue was 2.48 billion, up 36 percent from the same period last year.
Netflix stock recently hit an all-time high of $133 a share. At that price, as Clement Thibault points out, the company is trading at a whopping price to earnings ratio of 360, the third highest on the S&P 500. Put another way, investors are incredibly optimistic about the future of Netflix compared to the reality of its current financials.
In October of last year, Netflix announced plans to produce 1,000 hours of original programming in 2017 — up from 600 hours in 2016. In its third quarter earnings report from October 2016, the company said that expansion would require it to spend $6 billion on content in 2017.
That’s a billion dollar increase from what it spent in 2016, suggesting the company has found ways to get more value out of every dollar it spends on creating new content. It’s producing two-thirds more original programming than it did last year, but spending just 16 percent more. At this point, the only TV network spending more on content is ESPN.
The company gave itself a pat on the back, noting in its investor letter that “we launched original programming on Netflix in 2013 and in just four years, our original series accounted for five of the top 10 most searched TV shows of 2016 globally, including Stranger Things at #1, according to Google trends.”
Netflix expects its competitors to start copying some of its innovations, for example releasing an entire season of a new show at one time. “The BBC has become the first major linear network to announce plans to go binge-first with new seasons, favoring internet over linear viewers,” the company wrote in its investor letter. “We presume HBO is not far behind the BBC. In short, it’s becoming an internet TV world, which presents both challenges and opportunities for Netflix as we strive to earn screen time.”
Along with its note about competition, Netflix highlighted the potential risk of a regulatory changes under a new presidential administration in the US. “Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable,” the company wrote. “On a public policy basis, however, strong net neutrality is important to support innovation and smaller firms. No one wants ISPs to decide what new and potentially disruptive services can operate over their networks, or to favor one service over another. We hope the new US administration and Congress will recognize that keeping the network neutral drives job growth and innovation.”