Where will Netflix’s next 200 million subscribers come from?

netflix ( NFLX -2.65% ) ended 2021 with over 220 million subscribers worldwide. While subscriber growth has slowed significantly from pandemic-fueled 2020, the streaming service still added 18 million net new subscribers for the year.

Many investors are worried about whether this is the new normal for Netflix going forward, or whether it can return to its pre-pandemic average of around 25-30 million net adds per year. But for a company that sees its addressable market as the one billion broadband homes outside of China, management would say it has plenty of growth left.

Here’s where the next 200 million Netflix subscribers will come from.

Netflix offices in Singapore. Image source: Netflix.

Europe and Asia are still massively under-penetrated

Netflix did not expand to much of Europe or Asia until its full global expansion in 2016. So many countries still have much lower penetration rates than the United States or from Canada.

“We have little penetration in much of APAC [Asia Pacific]“, Chief Financial Officer Spencer Neumann told an investor conference in early March. “EMEA [Europe, Middle East, and Africa] is a market that is a multiple of the size of UCAN [U.S. and Canada]and we are weakly penetrated into it.”

Indeed, MoffettNathanson analysts believe Netflix can add more than 24 million new subscribers by 2025 in Japan alone. South Korea could add another nine million. Germany, France and Italy could combine to bring more than 33 million new subscribers over the same period.

One of Netflix’s biggest opportunities is India, where it has struggled to gain subscribers despite concentrated market efforts. A low-cost mobile-only plan hasn’t been able to help Netflix reach the millions of price-conscious consumers in the country. Meanwhile, waltz disney‘s Disney+ Hotstar has managed to rack up 46 million subscribers, mostly in India, in just a few years. Disney’s success shows that there is still plenty of growth potential in the country.

The United States, Canada and Latin America no longer have much growth

Unsurprisingly, markets where Netflix has operated its streaming service longer have higher penetration rates. While Neumann believes there is still room to improve household penetration in these markets, the opportunity for growth is still much smaller.

MoffettNathanson thinks the US and Canada will only add 6.8 million subscribers over the next four years. That would put it right in the middle of management’s long-term forecast of between 60 million and 90 million US domestic subscribers, which CEO Reed Hastings originally laid out 10 years ago.

Meanwhile, Latin America is also showing signs of saturation. Netflix only added 2.4 million subscribers in Latin America in 2021. The company is looking for ways to expand in these regions, or at least increase revenue, by reducing password sharing. It urges users it finds to share passwords in certain markets to pay additional fees or create their own account, starting with Latin America.

What this means for investors (and policyholders)

Netflix’s primary way to grow its subscriber base in under-penetrated markets is to invest heavily in content and marketing. This means more European, Japanese, Korean and Indian series and films.

The good news for Netflix investors is that audiences around the world have learned to enjoy more international content. See last fall’s success squid game for an example of how Netflix can turn content aimed at a single market (South Korea) into a massive global phenomenon. Additionally, local productions in Asia and Europe generally cost much less than similar productions in Hollywood, so it’s a much more efficient use of the content budget for Netflix.

For the company to meet its long-term financial outlook, grow double-digit revenue and increase its operating margin each year, it must continue to raise prices in its most saturated markets. This could mean targeted price increases for password sharers if the company’s current test works to increase revenue, but it could also increase prices for everyone else to produce a more meaningful increase.

Netflix will need to strike a balance between spending enough content to justify further price increases for the streaming service while improving profitability and cash flow for investors.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Comments are closed.