Potential 40% Boost to Netflix From International Markets

| About: Netflix, Inc. (NFLX)

The future looks bright for Netflix (NASDAQ:NFLX), which has built a strong position in the US video rental market and is now going global. In an earlier article, we argued that the company’s new Canadian streaming video service could add more than 10% to our $85 stock price estimate for Netflix.

We see additional upside for the stock if Netflix can build significant subscriber bases in international markets beyond Canada. International expansion will also alter Netflix’s competitive landscape, which in the US, is dominated by large media players like Comcast (NASDAQ:CMCSA), Time Warner Cable (TWC), DirecTV (DTV) and Dish Network (NASDAQ:DISH).

Our analysis of the international opportunity follows below.

Subscribers Flocking

We expect Netflix’s total subscriber count to approach 39 million by the end of our forecast period, up from around 19 million today. But if international growth boosts the subscriber count to 58 million by 2016, there could be a 45% upside to our current stock price estimate of $85, propelling it to $121.

You can drag the trend-line in the chart below to create your own subscriber forecast for Netflix and see how it impacts the company’s stock price.

Shipping Costs Dropping

In the U.S., Netflix rents physical DVDs and also streams video directly to users over the Internet. Internationally, we expect Netflix to provide streaming services only. As international subscribers increase, the average number of DVDs mailed per customer per month should decline.

In the U.S., we expect monthly DVD mailings per subscriber to decline from about 6 today to 4.3 by the end of the Trefis forecast period. There could be an additional 19% upside to our price estimate if the average number of DVDs mailed per subscriber per month were to decline to around 3 by 2016 as a result of international expansion. In this scenario, the stock price would rise to $137.

In the next interactive chart, you can drag the trend-line to create your own forecast for DVDs mailed per subscriber and see how it impacts Netflix’s stock price.

Expensive Bandwidth

One stumbling block for Netflix is that its bandwidth costs are likely to rise in international markets. All things being equal, the average number of videos streamed per subscriber per month should increase in markets where Netflix does not rent physical DVDs. Looking at the U.S. market, we expect that figure to reach 3.2 by the end of our forecast period.

However, the average number of videos streamed per subscriber per month could exceed 6.5 by 2016 if Netflix’s international strategy pans out.

In this scenario, we estimate that rising bandwidth costs would subtract nearly 5% from the Netflix price estimate, pushing it down to $133. You can drag the trend-line in the chart below to create your own forecast for the average number of videos streamed per Netflix subscriber, and see how it impacts the company’s stock.

Fees Shrinking

One more caveat: In the U.S., Netflix currently charges subscribers $8.99 a month for DVD rentals and access to online streaming. Delivering movies online costs significantly less than shipping DVDs through the mail. Netflix will probably pass this cost savings on to customers in the form of lower subscription fees.

We currently expect the average monthly subscription to decline from around $12 today to $10.50 by the end of the Trefis forecast period. Let’s assume that Netflix charges only $7 a month for a streaming-only subscription. In this scenario, the average subscription fee would decline to around $9.50 by 2016. This would slice around 18% from our scenario price estimate, pushing it down to $118.

You can drag the trend-line in the chart below to create your own subscription fee forecast and see how it impacts Netflix’s estimated stock price.

Taking all these scenarios together, we see a potential upside of about 40% ($33) to our current price estimate in the event that Netflix’s international strategy succeeds.

Disclosure: No position