Netflix Canada Could Lift Stock by 10%

-17.39%
Downside
607
Market
502
Trefis
NFLX: Netflix logo
NFLX
Netflix

Can Netflix (NASDAQ:NFLX) repeat its domestic success in international markets? During the subscription video company’s recent earnings call, management announced that they plan to test a streaming video service for Canadian customers.

We think international expansion could boost the stock substantially. We believe that the Canadian market alone has the potential to add at least another 10% to our $85.26 stock price estimate for Netflix. Our analysis follows below.

Subscriber growth

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We currently expect Netflix’s subscriber base to reach 40 million by the end of the Trefis forecast period. However, subscriber growth could exceed our forecast significantly if Netflix succeeds in Canada and other international markets, albeit at the expense of lower average subscription fees.

The reduced fees will result from the company’s limited online catalog and the lower cost of streaming compared to physical DVD delivery; Netflix is likely to pass these savings on to customers.

Here’s our rationale: Netflix acquired 1.5 million U.S. subscribers during the first six to seven years after its 1997 launch. But at that time Netflix had an unproven model, limited content and very little name recognition. Today Netflix is one of the dominant DVD and streaming distribution brands in the U.S. Even though Netflix will only offer streaming video to Canadian subscribers, we think the company could easily add sign up 3-4 million Canadian subscribers during our forecast period.

As subscription feesĀ  and bandwidth costs drop, we expect subscriber growth to accelerate. All in all, we think Netflix Canada could yield a minimum upside of 10% to our current stock price estimate for Netflix.

You can drag the trend-line in the chart below to create your own subscriber forecast for Netflix and see how it impacts the company’s stock price.

The limits of streaming

In the U.S., Netflix distributes video content via physical DVD rentals and online streaming. This dual model provides value and convenience to its customers. And while streaming is easier and cheaper than shipping DVD’s through the mail, most new releases are only available on DVD.

So the challenge of offering a streaming-only service, as in Canada, is that Netflix’s online library consists mainly of older movies and TV shows.

That said, Netflix is working hard to update its streaming catalogue via digital distribution deals with content providers like Relativity Media and Epix.

International Competition

As Netflix expands internationally, it is likely to face competition from established local video distributors such as Europe’s Lovefilm service.

Although Lovefilm is smaller than Netflix, it offers similar services and is likely to offer stiff competition if Netflix tries to enter the European market.Lovefilm is also beefing up its online delivery technology, just as Netflix has done in the U.S.

Other Hindrances

If it wishes to thrive overseas, Netflix may also need to add video content that appeals to specific international audiences. The company acknowledges the challenge of acquiring the right content at the right price.

Unfavorable Internet service provider (ISP) policies could also hinder Netflix’s digital strategy overseas. After Netflix announced its new Canadian streaming service, for example, one of the Canada’s largest ISPs, Roger Communications lowered the data caps on its plans.

You can see the complete $85.26 Trefis price estimates for Netflix’s stock here.