All Eyes Are On International Growth As Netflix's Q3 Results Approach

Investors only seem to have one question for Netflix, Inc. NFLX this week: will the company continue to grow internationally? "International sub growth has been the key for this stock,” Sean Udall, CIO of Quantum Trading Strategies and author of The TechStrat Report, told Benzinga. The streaming video giant had more than 50 million subscribers at the end of the second quarter. Netflix is spending millions of dollars on new content to ensure that growth continues in the coming months and years. “They are about to hit probably 38 percent penetration of U.S. broadband homes this quarter,” MKM Partners analyst Rob Sanderson told Benzinga. “And they're accelerating. You don't accelerate at 38 if you're about to hit a wall.” Sanderson believes that Netflix's content investments are showing up where they matter most. He said the company is becoming a really big platform, but he doesn't think the company should reveal the success or failure of each individual series. "It's hard to say how many incremental subs came from 'Arrested Development,' 'Orange is the New Black,' 'House of Cards' or whatever,” Sanderson added. “The aggregate of their investment is paying off. That's very apparent in the momentum they have in subscriber acquisition."

Related Link: Will Adam Sandler, 'Crouching Tiger' Bring New Subscribers To Netflix, Inc.?

Compelling Content

It might cost a lot to acquire new content, but Wedbush analyst Michael Pachter isn't against the initiative. “They need to keep things fresh, so more content is always good,” Pachter told Benzinga. “The more exclusive the content, the more likely people are to join/remain members, so the ‘Crouching Tiger' and Adam Sandler movies matter.” Pachter's hopes are not as high for content that could appear on other streaming video services. “‘Gotham' is not as compelling, and will likely end up on Amazon Prime Instant Video as well,” he added. Netflix secured the exclusive international streaming rights for “Gotham” that will allow the company to stream the series after its initial run on TV. Current episodes are temporarily available on Hulu.

Big Budget

Investors often worry about the vast amount of money that Netflix has spent on new content, but Sanderson is not concerned. He estimates that the company will have a $4.3 billion content budget in 2014. He suspects that the majority ($2.5 billion) will be used on domestic content, both original and acquired. "They have a giant content budget,” said Sanderson. “To subsidize an experiment like 'Crouching Tiger,' maybe they're throwing down $30 or $40 million on that, and that could be high. But it's a really small bet within the content budget that's over $4 billion.” Sanderson cautioned that Netflix can't spend haphazardly but said it makes sense for the company to experiment, push boundaries and study the results. “They may not be able to pinpoint the P&L in advance of the experiment, but [they're] gonna learn a lot,” he added. “They're seen in the industry as a really innovative platform and kind of a cool playground for the creative talent. That's important for Netflix: being able to be seen as a cool place to go spend your time on the creative, [which] will reap all kinds of benefits down the road as they become a bigger content financer." Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.