Netflix’s Success Story Rides on International Growth

Netflix (NASDAQ:NFLX) is witnessing promising subscriber growth numbers from its international streaming business. It recently crossed 1 million subscribers in Canada and has announced plans of entering Latin America and the Caribbean later in the year. However Netflix’s success can be challenged by varying demographic and income profiles of customers from different countries as well as limitations related to ISP bandwidth and broadband quality. Moreover, the streaming space is pretty competitive with players like Amazon (NASDAQ:AMZN) Prime, Apple’s (NASDAQ:AAPL) iTunes, Hulu, and Dish’s (NASDAQ:DISH) Blockbuster, and we wouldn’t be surprised to see other players like Google (NASDAQ:GOOG), AT&T (NYSE:T) or DirecTV (NASDAQ:DTV) entering this space soon. That being said, Netflix has ambitious plans for international expansion and is investing heavily into its streaming service by constantly improving and innovating its offerings.

While we expect Netflix’s international streaming subscribers will increase from 4.3 million in 2012 to around 23 million by the end of our forecast period,  Trefis members predict an increase from 6.2 million in 2012 to 28 million during the same period, implying an upside of just under 10% to the Trefis price estimate for Netflix’s stock.

We currently have a Trefis price estimate of $221 for Netflix’s stock, which is about 15% below the current market price.

Netflix Spreading its Wings …

Netflix is definitely seeing strong growth in its streaming business as evident by the fact that almost 75% of its new subscribers last quarter signed up for streaming-only plans. Last month, the company announced that it will expand its streaming service to 43 countries in Latin America and the Carribean region later this year.

Netflix started its streaming service in Canada in September 2010 and in less than a year has reached 1 million subscribers, and we think its expansion plans in more densely populated regions like Latin America will push its subscriber numbers higher. Netflix has also set its eyes on Europe and may likely launch its streaming service in Spain and the U.K. in the first quarter of 2012. ^[1] With the expansion plan set in place, we think Netflix can see a significant boost in its international streaming subscription.

…. But Should Avoid Spreading Too Thin

The subscriber growth in Canada is encouraging for Netflix as it continues to face hurdles like Internet server provider (ISP) bandwidth caps which prompted it to switch to lower-quality video streaming. ^[2] Latin America, which is potentially a much bigger market, also has the same issue of poor broadband quality. Another caveat is low per capita income in the region that might reduce the near-term adoption of Netflix service.

But we expect Netflix to override these problems in the longer term and benefit from its focus on innovation and improving user experience.  For instance, Netflix’s latest website feature is called “Just for Kids” that makes it easier for parents and kids to find kid-friendly TV shows and movies. We believe this a good addition since around 25 million Netflix subscribers in the U.S. and Canada have instantly watched at least two movies or shows for kids in the last 90 days. ^[3]

Our complete analysis for Netflix’s stock is here.

1. Netflix Plans Europe Expansion as Growth at Home Slows, SiliconAngle, July 18, 2011 [↩]
2. Netflix Canada Switches to Lower-Quality Streaming to Avoid Bandwidth Caps, Pcmag, March 29, 2011 [↩]
3. Netflix Launches ‘Just for Kids’ Experience, Hollywood Reporter, Aug 16, 2011 [↩]