Netflix, Inc. (NASDAQ:NFLX) has a higher ARPU in the international market compared to domestic numbers, whereas net content investment per subscriber and the delivery costs per subscriber are currently lower internationally, according to a report from Evercore Partners. Analyst Alan Gould authored the June 9th research report. Gould noted that international margins should be more or less equal to the more mature but still growing domestic margins. However, at maturity, international profits could be in line or even outpace the domestic profits.
European expansion vital
Furthermore, Gould expects international paid subscribers to reach 33 million by the end of 2016 and over 50 million in 2018. Broadband penetration would be around 15% (2016) and 20% (2018) from 12.8 million subscribers, vesus a 12% broadband penetration currently.
Netflix, Inc. (NASDAQ:NFLX) has already announced plans to expand into European countries such as Germany and France in addition to Austria, Switzerland, Belgium and Luxembourg. The content streaming company will enter these markets sometime in September or October. The expansion could add up to 65 million to the current subscriber base of 105 million broadband homes, according to the Evercore report.
Once Netflix, Inc. (NASDAQ:NFLX) gains substantial market share in Western European markets, it will then expand into comparatively smaller Central/Eastern Europe and Southern Europe over the next two years. Management has already decided to invest excess cash and earnings into international expansion. According to Gould, the firm’s cash content spend could rise over $4 billion this year from $3.1 billion in 2013.
MVPDs pose biggest threat to Netflix
The report suggests that the biggest challenge for Netflix, Inc. (NASDAQ:NFLX) will be to acquire rights in different markets, which could be a difficult endeavor and is not easy to forecast. Gould expects that the biggest competition will come from MVPDs, contrary to those who think that players like HBO, Amazon, Hulu, Google and Apple would pose a threat. MVPDs are already the largest buyer of content in the market and have a huge business to protect.
Although the Netflix, Inc. (NASDAQ:NFLX) stock looks poised to grow in the near term on the back of sound metrics, Gould will continue to assess the price on the basis of announcements and earnings as global subscriber numbers will surge at a 30% rate this year and domestic contribution margins continue to grow 400 basis points year over year.
Evercore has raised its estimate for the international business from $50 per share to $160 per share, upgraded the price target to $500 from $400 and assigned an Overweight rating to the equity.
