Netflix Price Estimate Revised to $112 Based On International Expansion Potential

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Netflix (NASDAQ:NFLX) is working tirelessly in order to bring its international expansion strategy to fruition. The company recently expanded into 130 new countries and now has a presence in 190 countries. Netflix also posted strong numbers in its quarterly earnings announcement on January 19th. (You can read our earnings review here.)  Subscriber growth exceeded expectations as the company added a record 5.59 million subscribers during the last quarter of 2015 to take its subscriber total past 75 million globally as of January 1, 2016. [1] User engagement is also at an all-time high and Netflix’s subscribers streamed 42.5 billion hours of content in 2015, up from 29 billion hours in 2014. [2] Netflix is already an established player in the U.S. online streaming industry and we believe that the company will continue to make its presence felt in the global streaming space as well. We are revising our price estimate for Netflix to $112 based on the following analysis.

See our complete analysis for Netflix

Netflix Will Have 80 Million International Subscribers By 2022

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The subscriber growth in Netflix’s International segment has been very robust so far, with the subscriber base increasing from 1.9 million customers in 2011 to over 30 million by the end of 2015. [1] Netflix has been aggressively expanding in international territories for the last year and a half. The company launched operations in Western Europe and ANZ (Australia & New Zealand) in September 2014 and March 2015 respectively, giving it access to a combined potential subscriber base of about 74 million broadband households. [3] [4] Netflix subsequently launched in Spain, Italy and Portugal in late 2015. In the first week of January 2016, the company expanded into 130 new countries and now has a presence in 190 countries. [5]

Additionally, Netflix has been targeting the Asia-Pacific in a big way and the company entered its first Asian market when it launched service in Japan last September. South Korea, Singapore, Hong Kong, Taiwan and India were some of the other major markets that Netflix launched service in as part of the January 2016 global launch. The one notable exception is China and the company is doing all it can to enter this lucrative market. Netflix has held talks with Jack Ma-backed Wasu Media Holding Co. and other content companies in the past and CEO Hastings believes the company is on “a slow and steady path” to entering the country. [6] We believe that Netflix will eventually enter China by collaborating with a local partner. The Asia-Pacific holds a lot of promise for Netflix as the region offers a potential target market of around 280 million households (assuming one high-speed internet connection per household). [7] We believe that Netflix will experience healthy adoption rates in the newly launched countries on the strength of its original content and its competitive pricing. As a result, we believe that Netflix can cross 80 million international subscribers by the end of our forecast period.

International Contribution Margins Will Become Positive By 2018

Netflix’s international operations are still unprofitable as the company continues to invest heavily in its expansion. The markets that Netflix launched into prior to 2014 (Canada, Latin America, the UK, Ireland, the Nordic countries and the Netherlands) became profitable on a contribution basis in Q3 2014 and continue to grow. [8] The company acknowledges that progress has been so strong that it now believes it can complete its global expansion phase while managing to still be profitable. This is possible as Netflix will start experiencing operational efficiencies as it grows operations in the target countries. The marketing expenses will also come down as a percent of sales once the company establishes itself in these countries. We believe that Netflix’s international segment will start to break even by 2017 and will start having positive contribution margin from 2018 onward. It will then stabilize at around 30% by the end of our forecast period.

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Notes:
  1. Netflix’s SEC Filings [] []
  2. Q4 15 Letter to shareholders, Netflix Investor Relations []
  3. Q3 14 Letter to shareholders, Netflix Investor Relations []
  4. Q1 15 Letter to shareholders, Netflix Investor Relations []
  5. Netflix Is Now Available Around the World, January 6, 2016, Netflix Media Centre []
  6. China Remains Roadblock to Netflix’s Global Expansion Ambitions, January 7, 2016, Bloomberg []
  7. List of countries by number of broadband Internet subscriptions, Wikipedia []
  8. Q4 14 Letter to shareholders, Netflix Investor Relations []