Are Netflix’s International Ambitions Justified & Achievable?

by Trefis Team
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Netflix (NASDAQ:NFLX) is an online movie rental company that operates with a two delivery methods: DVD shipments and online streaming. The shift to online streaming is growing in popularity and is evident as DVD shipped per subscriber is declining. More than one third of new subscribers are now going for streaming-only service, and Netflix is aggressively beefing up available content to attract new users. Netflix’s growth will come from increasing its subscription base, and we believe that Netflix will look to international markets as a core element to its growth plans (beyond Canada). Although Netflix’s business model is unique, it still competes with Apple’s (NASDAQ:AAPL) iTunes, Hulu, VoD services from pay-TV providers like Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC) and others.

Our price estimate for Netflix stands at $119, which is well below the current market price of around $200. The discrepancy primarily results from our belief that Netflix may not be able to achieve the kind of subscriber base that is required to justify the current market price. Our previously published article titled Netflix Stock is a Risky Bet with Market Saturation on the Horizon discusses our concern in detail. Netflix’s subscriber growth depends substantially on how well the company does in international markets because it is going to be increasingly difficult for Netflix to continue fast growth within the U.S. Below you can see how higher subscriber growth can impact Netflix’s price estimate.

International Opportunity as Netflix Sees It

The company launched its streaming-only service in Canada in 2010 and has received a good response. Netflix expects to be profitable in Canada within a year from its launch. Additionally, at the end of Q1 2011, it expects to have somewhere between 750k to 900k million international subscribers. [1] Netflix plans to expand globally and expects to be profitable in a new market within 1-2 years of launch depending on the amount of traction it gets.

The chart below is taken from Netflix’s business opportunity presentation and gives a big picture of company’s ambitions. [2]

Our Concerns and a Prediction

We have written an article previously (see article Potential 40% Boost to Netflix from International Markets) discussing how international markets could help Netflix in faster subscriber growth and reduced costs thereby holding potential to boost our price estimate. [3] The cost reduction due to international expansion (assuming successful subscriber gains) stems from the fact that Netflix will purely be a streaming service and will thus not have to bear costs of DVD shipments, which tend to be a lot higher than streaming costs.

However we have our doubts whether Netflix will be able to replicate the success that it has enjoyed in the U.S. to other markets. Some of the more feasible geographies of expansion like Canada and U.K. have much smaller market sizes compared to the U.S. One of our upcoming articles will focus on the U.K.’s addressable market for Netflix and its competitive threats as we think this may be one of the first overseas markets Netflix will enter.

Developing markets like China and India have huge populations, but reliable broadband service as well as the growing need for network capacity is a concern in terms of penetration and speed. It must be noted that one of the advantages that Netflix has is that it has rapidly built up a subscriber base and is ahead of competitors in its own business model. The key to sustained growth will be rapidly expanding outside the U.S. and not allow competitors to catch up. However the hurdles discussed above could potentially put brakes on Netflix’s pace thus mitigating the advantage it has.

Do you think Netflix’s ambitions are realistic and it can replicate its success outside the U.S.? You can modify our subscriber forecast above to see impact on price estimate.

See the complete $119 Trefis price estimate for Netflix’s stock.

  1. Netflix’s letter to shareholders, Q4 2010 []
  2. Netflix business presentation []
  3. Some of the figures have changed since then due to model updates based on earnings []
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