Will Olympics Affect Netflix’s Q3 Subscriber Additions?

Recently Netflix (NASDAQ:NFLX) offered clarification against a report stating that its traffic dropped during the Olympics. ^[1] The company said that the traffic was more or less normal except for occasional dips, and this indicates that despite the attention grabbing global event, people are still watching Netflix. Although the traffic does not directly impact Netflix’s revenues, it surely is an indicator of Netflix’s utility for its subscribers.

The company may witness a slight slowdown in the U.K. market where the impact of the Olympics would have been more prominent. Some potential customers might have been distracted with the Olympics and would have prolonged their purchase of Netflix’s service. However, the U.K. is still a small portion of Netflix’s overall subscriber base, and therefore the absolute impact will be quite minimal. Over time, what really matters to Netflix is how it can defend itself against competition, keep enhancing its content and gain traction internationally. These three aspects are what investors should really care about.

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Our price estimate for Netflix stands at $96, implying a premium of more than 50% to the market price. We still maintain our bullish stance on Netflix due to its lead over its competitors in terms of content and international expansion. Profits will remain low due to high content costs but, over time, this initial investment will pay off as the base expands internationally. The DVD subscriber losses are somewhat eclipsing Netflix’s gain in streaming and investors should be aware of that.

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1. Netflix loses few viewers to the Olympics, CNET News, Aug 2 2012 [↩]