Video streaming service provider, Netflix Inc. (NFLX) recently hit a new 52-week high of $489.29 on Sep 9, 2014. The company expanded its services to six new European countries namely Germany, Austria, Switzerland, France, Belgium and Luxembourg. To date, this is Netflix’s largest international expansion at one go.
Since starting international operations way back in 2010, Netflix has experienced strong growth in subscriber base in the region. Over the last 12 months the company added 6.05 million international subscribers.
During the four years, Netflix expanded into the Latin America, UK, Ireland, Finland, Denmark, Sweden, Norway and Netherlands. The recent expansion into Germany and France, where households have significant access to high-speed Internet is a prudent decision.
Per estimates from SNL Kagan, Netflix is expected to have 29.9 million broadband household customers in Germany and 25.3 million in France in 2014. However, Netflix will face competition from Amazon.com’s (AMZN) Prime Instant Video service in Germany and Canal Play Infinity from Vivendi’s Canal Plus in France.
Moreover, Netflix may face regulatory hurdles in France regarding streaming of movies. Regulations do not allow monthly subscription video service providers such as Netflix to stream a film until it completes three years since its premiere in theaters.
However, the film may be rented through a set-top box four months after its premiere. This is where we believe that Netflix’s partnership with the likes of TiVo (TIVO) will come in handy. The company can also enter into alliance with local cable operators to provide the service in the country.
International expansions are one of the key growth catalysts for Netflix. However, starting operations in a new country demands huge investments and considerably increases marketing and general and administrative expenses. Netflix, therefore, expects the international segment to continue to report loss for the rest of the 2014.
The company reported $71.0 million earnings in the recently concluded second quarter, which was significantly better than an earnings of $29.5 million posted in the year-ago period. At the same time, international revenues (37.0% of revenues) soared 85.3% year over year and 15% quarter over quarter to $495.8 million, which is encouraging.
We believe that Netflix’s expanding content portfolio based on partnerships with the likes of Walt Disney (DIS) and focus on increasing customer engagement will beef up the top line in the long run.
Although rising content costs and investments related to international expansion is a major headwind, we believe that a fast growing subscriber base will drive the top line and profitability going forward. Additionally, price increases (for both domestic and international new users) will help Netflix to offset higher expenses in the near term.
Currently, Netflix has a Zacks Rank #3 (Hold).
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