Valuing Netflix International Business

  • Netflix is all set to expand into 6 more European countries.
  • International expansion is the way forward though profits will be affected.
  • Netflix is a great business, but an expensive stock.

Valuing Netflix International Business

On 21 May 2014, Netflix (NASDAQ:NFLX) announced that it plans to launch online movie and TV subscription services in six European countries. Netflix will commence this expansion with Germany and France, followed by Austria, Switzerland, Belgium and Luxemborg in late 2014. We see the move as a positive, as international expansion holds the key to long term growth for Netflix.

In Europe, Netflix will be adding to its existing operations in Scandinavia, Netherlands and Britain. Netflix is likely to face additional competition in this region, with the potential merger of Britain’s largest pay - TV company BskyB with Sky Deutschland and Sky Italia, into one larger, stronger entity. Further, in Germany, the company will have to stave off competition from Amazon’s Prime Instant Video among others.

Some of the other local competitors have heavily slashed prices to gain market share ahead of Netflix’s entry into Germany; and in France, the local rules favour cable operators, who are allowed to distribute movies 4 months after a theatre debut, as against a 3 year restriction on online monthly subscription video services like Netflix. The company might consider tying up with cable operators, as it has in the US.

Apart from competition, in these regions, the challenge will come in the form of increased costs and the need to be able to provide quality local language content. Further, its competitors in France and Germany for instance, not only serve English content, but also some of Netflix’s productions like ‘House of Cards’ to which it doesn’t possess exclusive licenses.

One should expect profit margins to contract as expansion is under way. Netflix’s international streaming segment hasn’t made any profits yet. However, the margin of loss has been decreasing and the company expects to see other international geographies turn profitable. That said, its ‘international’ segment as a whole will continue to report losses following the addition of these new geographies.

Netflix Domestic and International Streaming Profitability

Where the expansion could really start to kick in, is in terms of revenue growth. Netflix’s domestic (US based) streaming business has been growing steadily at a solid rate of 25% Y/Y. The big growth, albeit on a smaller base, is coming from Netflix’s international operations.

Netflix’s international revenue growth rate dipped below its 100%+ growth rate for the first time in Q1 2014, but remained robust at 88%. The faster rate of growth is due to the smaller base, as international revenue is about 1/4th of total streaming revenue, while US streaming accounts for the rest of the streaming revenue for Netflix.
Netflix Domestic and International Streaming Reveue

Revenue growth is directly dependent on member growth. Spurred by the expansion, if international user growth goes back to its 100%+ levels, the balance between domestic and international revenue will shift significantly over the next 2 years. The contributions of domestic and international segments could be nearly equal over a two year period.

While there may still be scope for further growth in the US, both member base and revenue are growing at about 25% in the region, and it is the international markets that can really drive massive growth. It goes without saying that these geographies will bring along their unique challenges, be it competition, unfavorable rules or rampant piracy.

Further, as we discussed earlier, Netflix’s international segment has been gravitating towards profitability. So focusing on the scale that such expansion can provide, assuming that Netflix’s domestic segment grows at a marginally slower 20% Y/Y and its international segment grows at 100% Y/Y over the next two years, the company’s revenue growth looks attractive.


FY 2012

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FY 2015

Domestic Streming Revenue (billion $)





International Streaming Revenue (billion $)





Total Streaming Revenue (billion $)





Y/Y Streaming Growth %





Netflix Valuation

To sum up, we think Netflix is a company with great potential. We like everything about the company, barring the pricing of its stock. Trading at a Price/Earnings (P/E) multiple of 137, we think it’s too expensive in terms of P/E. In terms of P/S, though it’s expensive at a multiple of 4.8, there are companies out there which don’t have the compelling business that Netflix does and still enjoy a higher P/S multiple.

Like we said before, we think the stock is expensive. However, it may be suitable for those who don’t mind paying a big premium purely for strong growth potential and an attractive business model which might eventually be able to generate healthy profit margins.

View our company analysis of Netflix.

To see Netflix’s current stock price, please click here: (NASDAQ:NFLX)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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