Sometimes, investors can’t see the forest for the trees and focus on the short-term bad news as opposed to the long-term good news. Other times, they seem to do the exact opposite. In the case of Netflix, investors cheered the company’s international growth on Tuesday, and more or less ignored the fact that it missed its U.S. forecasts.
Admittedly, the streaming-video service didn’t miss its U.S. subscriber targets by much. But it still recorded only 1.59 million new users, compared with estimates of 1.62 million—and sharply lower than the 1.9 million it signed up in the same quarter last year.
In most cases, investors like to see stocks that are as highly valued as Netflix beat their targets handily, not miss on the low side. But despite that, the company’s share price (NFLX) climbed by as much as 10% in after-hours trading on Tuesday. Even with a mild slump since December, Netflix is still more than 120% higher than it was a year ago.
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Tuesday’s climb is a bit of a surprise given what happened to the company last quarter. When it reported its results three months ago, Netflix said it had only added about 880,000 U.S. subscribers, instead of the 1.15 million analysts and investors were expecting. Investors panicked and the shares plummeted by as much as 15%.
At this point, however, the market seems more interested in the company’s booming international growth. It added 4 million subscribers outside of the U.S. in the latest quarter, substantially higher than the 3.5 million analysts were expecting.
“The value of the stock is coming from international markets,” RBC Capital Markets analyst Mark Mahaney told Bloomberg. “A domestic subscriber miss two years ago would have caused the stock to trade down regardless of the international number.”
Netflix CEO Reed Hastings recently announced at the Consumer Electronics Show in Las Vegas that the streaming service is now available in more than 130 countries. And based in part on that expansion, the company said in its earnings announcement it expects to add as many as 6 million subscribers globally in the current quarter.
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While the market is focused on Netflix’s subscriber growth, some analysts are warning that it faces some significant headwinds financially, including a dramatic increase in content costs. The company said it is premiering eight new feature films, 30 original series, 35 children’s shows, 12 documentaries, and nine comedy specials this year alone—an expansion that some analysts say could cost $5 billion.
The streaming service’s content costs have climbed from just $6 billion in 2012 to more than $10 billion last year, some skeptics point out, while Netflix’s revenue has only grown from $4.3 billion to about $6 billion in the same period.
To help pay for all of that great content, the service has boosted its price in the U.S. and some other markets, and it is counting on foreign subscribers to pony up in all of its new markets as well. But what if they don’t sign up as quickly as it hopes? That and the potential for increased competition, both in the U.S. and in foreign markets, are some of the things that keep Netflix investors awake at night.
