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Netflix Subscriber Surge May Be Online Video’s New Normal

29 April 2015 in Trading Ideas

Don’t tell Netflix shareholders that the market isn’t doing much this year.

The video rental service titan’s stock has climbed by nearly two-thirds this year, and is on a pace to hit $600 a share by sometime this summer – if not sooner.

Much of the company’s run-up in 2015 has come after its last two earnings releases, the most recent of which showed a jump in both revenue and subscribers. With those two metrics growing strongly in the first quarter, investors decided to not sweat a fall in profit.

Earlier this month, Netflix said revenue increased 24% while profit fell by more than half because of the strong dollar hurting international revenue.1

Fortunately, however, the company was able to point to a new, big number in its total of streaming video subscribers – it now boasts nearly 63 million of them, with approximately one-third of the subscriber base located outside the US.

Even more importantly, Netflix said it outpaced its own forecasts by adding a record 4.9 million new subscribers in the quarter, which beat the 4.3 million added in the previous quarter.

The company attributed its growth to an expanding portfolio of original shows, but it also acknowledged that the streaming online video market is intensifying. Time Warner’s HBO, for example released its standalone streaming service earlier this month, although Netflix has reiterated that there is room for both to succeed “given differing content.”

The rise of online video hasn’t been lost on advertisers, of course, who are intensifying their targeting of the sector’s consumers.

A recent forecast of global ad spending by research firm ZenithOptimedia, which calls for a 4.4% overall rise to $544 billion in 2015, noted that the fastest-growing category is online video, thanks to the explosion of mobile video consumption and the spread of internet-connected devices, such as smart TVs and games consoles.2

In addition, smartphones now have bigger and better displays, and transmission technologies like 4G are improving connection speeds, making it possible for consumers to watch high-quality video content wherever and whenever they choose, ZenithOptimedia said.

According to an Ooyala Global Video Index cited in an article on broadbandtvnews.com, mobile devices accounted for 34% of all online video plays in in last year’s fourth quarter, up from 17% a year earlier, the forecast said.

ZeinithOptimedia noted several other factors are also contributing to online video ad growth, including measurement agencies investing in research to track consumers’ exposure to video ads across desktop computers, tablets and television screens; the big social media platforms developing their own video products; and more online video being sold by programmatic buying, providing advertisers with more control and better value.

ZenithOptimedia estimates that global online video ad spending grew 34% to $10.9 billion in 2014, and forecasts it will grow at an average of 29% a year to reach $23.3 billion in 2017.

That sort of growth could mean more upside for Netflix and the stocks of other providers of online video products and services.

Netflix has a 23.9% weighting in the Online Video motif, which is up 16.6% in the past month. During that same period, the S&P 500 has increased 2.4%.

Over the past 12 months, the motif has risen 15.7%; the S&P 500 is up 15.1%.

1Tom Huddleston Jr., Netflix shares soar on revenue, subscriber growth as stock split nears,” fortune.com, April 15, 2015, http://fortune.com/2015/04/15/netflix-earnings-subscribers/, (accessed April 27, 2015).

2“Online video to lead 4.4% growth in global adspend in 2015,” broadbandtvnews.com, March 30, 2015, http://www.broadbandtvnews.com/2015/03/30/online-video-to-lead-4-4-growth-in-global-adspend-in-2015/ (accessed April 27, 2015).

  1. Jason Hart
    29 Apr at 1:58 pm

    One of the big reasons I use Netflix instead of other video services is because Netflix does not show ads. While we are seeing great growth in online video ads, I’m not seeing how Netflix’s success will lead to more online video ad views. Maybe Netflix will introduce people to online viewing and then these new viewers will be more likely to watch online videos from other services that do contain ads but it seems like YouTube or, more recently, Facebook is the more likely first experience with online video.