What Is The Potential Upside To Netflix’s International Streaming Business?

Netflix’s (NASDAQ:NFLX) international streaming business has been a major growth driver in recent years, as the company has launched its operations in several new geographies. According to Trefis estimates, the international streaming subscription business accounts for around 44% of Netflix’s value. Revenues have grown at a CAGR of 108% in the last five years. We currently project revenues to grow at a CAGR of 22.4% to $16.2 billion in 2024. In this note, we explore the upside to the international streaming businesses. Our price estimate for Netflix stands at $181, which is slightly below the current market price. Take a look at our interactive breakdown of Netflix’s international business and upside scenario to learn more.

Upside To International Subscriber Base

Netflix’s international subscriber base crossed the 50 million (paying subscribers) mark in Q3, and is growing at a robust pace. In the first nine months of 2017, it has added over 12 million subscribers even though competition from regional players in the online streaming industry is intensifying. International streaming subscribers have grown as the company has expanded to relatively underserved regions that are experiencing growth in Internet penetration and speed. Furthermore, consumers in international markets are increasingly cutting the cord in favor of streaming platforms, which has aided growth in Netflix’s international subscriber base. We currently forecast the international subscriber base to grow to close 125 million over our forecast period, at a CAGR of 13.7%. With more households getting access to high-speed Internet, it is possible that an even greater proportion of these households could potentially subscribe to Netflix’s services. If the international streaming subscriber base were to grow to over 180 million, there would be a 35% upside to our price estimate for the company’s stock.

Upside To Average Fee Per Subscriber

Netflix has demonstrated significant pricing power in recent years, as it has been able to increase the average fees paid by subscribers for both international and domestic markets without any material impact on subscriber numbers. For example, its average fee per international subscriber has gone up by 10%, from $6.87 in 2016 to $7.54 in the first nine months of 2017. Starting in December, Netflix will again be raising prices for its U.S. subscribers. We believe that in due course, the company will hike rates for international subscribers. While we currently estimate the company’s average fee per international subscriber to grow to around $11 by 2024, it is possible that ensuing rate hikes over our forecast period will drive this higher. If the company’s average revenue per international subscriber were to grow by a CAGR of 10.2% to nearly $16 over our forecast period, there would be an upside of around 40% to our price estimate.

Contribution Margins Can Improve Further

Netflix previously stated that its international streaming margins would turn positive by 2018, but it should achieve this milestone in 2017 as a larger portion of content costs will now be absorbed by the company’s international territories. We currently forecast that the contribution margins will grow to around 41% by 2024. However, as the company hikes its rates, the contribution margins could reach as high as 50%. This would not only improve our price estimate by 20%, but also boost the company’s cash flows in the coming years.

Cumulatively, there is nearly a 100% upside to the Trefis price estimate of $181 if all of these scenarios were to pan out.

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