Netflix Updates: U.K. Expansion Will Bring Challenges, $125 Fair Value

Netflix’s (NASDAQ:NFLX) stock has gained slightly over the course of last week as the company continued signing content deals for its entry in the U.K. and it reduced the compensation expense for its executives. ((Netflix CEO Hastings’ Yearly Stock Option Allowance Cut 50%, Bloomberg, Dec 23 2011)) Although the company has not commented, the reduction in clearly due to the weak performance of the stock given management’s blunders earlier this year in raising prices and splitting its core DVD and streaming operations.  Netflix has pioneered the online movie rental service in the U.S. and still enjoys a significant lead over competitors such has Amazon (NASDAQ:AMZN) and Dish Network’s (NASDAQ:DISH) Blockbuster. However, some of the recent management decisions have left the company struggling with subscriber defections and consequently gave up much this early mover advantage in the market.  Interestingly, this advantage may not be present when Netflix rolls out its expansion in the U.K. and Ireland in 2012, and we believe the company may face stiff competition there.

See our complete analysis for Netflix

The broadcasters in the U.K. have hold of some of the best content and are bundling their own streaming services with their TV programming. Last week Bloomberg reported that Netflix’s content will not include some of the successful shows in the U.K. such as Downton Abbey. ^[1]

To add to that, Lovefilm has been busy signing its own deals in order to strengthen its competitive position. ^[2] In short, there are clouds of doubt looming over Netflix’s potential success in the U.K. market, and that could very well affect its overall international subscriber growth. A significant slowdown in international subscriber growth compared to our current expectations could push down our price estimate below $100 for Netflix. You can modify our forecast above to see how international subscriber forecast can impact Netflix’s price estimate.

Our price estimate for Netflix stands at $126, implying a premium of about 75% to the market price.

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1. Netflix U.K. Debut Without ‘Downton Abbey’ Shows Local Grip, Bloomberg, Dec 23 2011 [↩]
2. ref:2 [↩]