RBC: Here’s why all the Netflix bears were wrong

Netflix reed hastings
Netflix CEO Reed Hastings delivers a keynote address at CES 2016 at The Venetian Las Vegas on January 6, 2016 in Las Vegas, Nevada. Ethan Miller/Getty Images

When a company relies almost exclusively on subscribers for revenue, it would make sense that there would be a saturation point where the company had all the subscribers it is going to ever get.

Investors thought Netflix was nearing that point yesterday, and short interest grew ahead of the company’s second-quarter earnings, meaning more investors were starting to bet against the streaming service. Those investors were wrong.

The company actually missed slightly on earnings, reporting $US0.15 compared to the $US0.16 expected by Wall Street, but knocked its subscriber growth numbers out of the park. Netflix reported 5.2 million subscribers when investors were only expecting 3.2 million.

So how was Netflix able to prove all its doubters wrong and grow its business? Here’s RBC Capital Markets:

“In Q2, it released 14 new original series seasons, 13 original comedy specials, 6 original documentaries, 2 original documentary series, 9 original feature films, and 7 seasons of original series for kids. It continues to invest in programming to please its members, with shows like Stranger Things, Cable Girls, and 13 Reasons Why. It also noted that this year it is releasing 40 feature films including Bright (one of its largest productions to date, with Will Smith) to increase its exposure to Original Films.”

Even though the company had to push back a big release of the latest “House of Cards” season, it still is producing content its subscribers love.

Netflix was recently nominated for 91 Emmys, which is double the number from last year.

RBC said, in a recent note to investors, that Netflix has underestimated the popularity of its original content internationally, which is “not a bad problem to have.” The popularity of its content has turned into surprising profits on top of subscriber growth.

For the first time ever, Netflix is expecting to make a profit on its international subscribers, according to RBC. International subscribers now make up more than half of the company’s subscribers. Domestically, Netflix has boosted its contribution margin, a measure of profitability for a product, for domestic subscribers from 16% in 2012 to 36% in 2016, according to RBC.

Huge subscriber growth, better content and better profitability led RBC to raise its price target for the company from $US175 to $US210, a 20% increase.

Netflix popped nearly 11% after crushing earnings on Monday, and is trading at $US182.55 on Tuesday.

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