Netflix (NFLX) - Get Netflix, Inc. Report is the largest video streaming service in the world by market share. It has nearly one-third of the market, with more than 210 million paying members in more than 190 countries.
Despite its size, Netflix has a relatively simple business model. Because one of the best pieces of financial advice is to invest in what you understand, that makes Netflix worthy of our attention.
Let’s take a look at how the company generates revenue, where its subscribers come from, and how it can continue to grow and deliver even more value to NFLX shareholders.
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How did Netflix start?
Netflix was founded in 1997 as a mail-based DVD rental service. And believe it or not, in 2000, its founders tried to sell Netflix to Blockbuster for $50 million. The deal was not accepted.
Blockbuster certainly missed out. Today, Blockbuster is a thing of the past, while Netflix has a market cap of roughly $275 billion.
Netflix’s library of popular TV shows and movies – along with award-winning original content – continues to attract subscribers and contributes to its exponential growth.
How does Netflix make money?
As we mentioned above, Netflix’s business model is super-simple. It makes money from streaming services. In fact, 99% of the company’s revenue comes from this segment. The other 1% comes from the mail-based DVD rental service that Netflix still maintains.
Users pay a monthly membership fee to access the Netflix platform and content. Three subscription plans (Basic, Standard, and Premium) are available. The price of a subscription varies between $3 and $14 per month, depending on the plan and where the subscriber is located.
In addition to Netflix’s simple business model, it’s also important to understand where the main subscribers and the company's highest revenues come from.
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Great opportunity in Netflix’s expansion
Netflix operates in nearly every country in the world, except for China, Crimea, North Korea, and Syria. This map shows where Netflix is – and isn’t – available:
However, the company's revenue distribution is still uneven:
There are two reasons for this.
First off, Netflix subscription plans are cheaper in developing countries in Latin America and Asia. Simply put, the company can charge more for its services in developed economies where households have more income, giving these market segments a bigger piece of the revenue pie.
Secondly, Netflix has had more than 20 years to gain a massive subscriber base in the U.S. and Canada. Its services are already a part of our daily lives. That’s not the case in Latin America and Asia, where many households still don’t have a Netflix membership.
And that’s where Netflix has the most potential for future revenue. The company’s expansion into these markets should ensure long-term growth for the company and its stock – even if growth in the U.S. stalls due to market saturation.
In addition, as underdeveloped and developed economies grow, Netflix will be able to charge higher subscription fees, also boosting revenue.
Netflix is a company with a simple proposition but a lot of value. We believe in the company's future development and that it will continue to deliver good results in the coming years. This will especially be the case as its membership grows in underdeveloped and developing countries.
Is the price right?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)