(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)

Netflix Inc. (NFLX) has officially entered its second phase of growth, with U.S. subscriber growth now waning, and international growth now accelerating. It likely means the company will need to focus on growing revenue in the U.S. through pricing power, while still piling on international subscribers. Shares of the stock have soared by around 66% in 2017, easily beating the S&P 500's return of just over 14%, meaning the pressure is on to deliver. (For more, see also: Is a Netflix Debt Bubble Coming?)

When it comes to subscriber growth Netflix seems to be entering a different realm; the company reported 5.3 million subscribers in its third quarter, which beat its forecast of 4.4 million. It appears international growth is just starting to ramp-up, and the runaway still looks very long. The current rate of international subscribers growth suggests the number of subscribers could grow to nearly 75 million by the third quarter of 2018 using a regression analysis. That could help total global subscriber's reach almost 135 million by September 2018, an increase of nearly 25 million from its current 110 million total subscribers.

NFLX Chart

NFLX data by YCharts

Slowing U.S. Growth

Domestic growth in the US, for now, appears to be topping out, and that means that Netflix will need to adjust its strategy in the U.S., and depend on the international market to drive subscriber growth. During the quarter the U.S. totaled just 850,000 net subscriber additions, while international net additions totaled 4.45 million. Revenue for the international unit totaled nearly $1.327 billion, while domestic revenues came in $1.547 billion. In total the company reported revenue of $2.98 billion, beating analyst expectations of $2.97 billion by just $11 million. Meanwhile, earnings came in ahead of estimates as well, at $0.37 versus expectations of $0.32.

International Growth Accelerates

The latest subscriber results show that international subscriber growth is starting to accelerate, with international subscriber net addition growing by 40% over the same period a year. The company is forecasting subscriber net additions of 5.05 million in the fourth quarter, which would be less than the number of additions in the fourth quarter of 2016 at 5.12 million. Based on the current subscriber growth trends, using a regression analysis suggest that international subscribers could total nearly 75 million by this time next year. That would be an increase of about 19 million subscribers, from the current 56 million—a growth rate of nearly 34%.

New Strategy?

Domestic subscriber growth has slowed, which likely means the company will need to adjust its model to grow revenue in the U.S. Using the same analysis process, domestic subscribers could approach nearly 60 million by this time next year, a growth rate of 11%. The slowing U.S. growth rate is likely the main driver behind the company's decision to boost the cost of a subscription just a few weeks back. (For more, see also: Netflix, Disney and the Cash Flow Drama.)

Netflix will now be dependent on its ability to use pricing power to drive revenue growth in the U.S. while adding massive amounts of international subscribers. Netflix is entering only the second phase of its growth, and it looks like that growth has much further to go.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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