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In its recently reported Q2 earnings, DirecTV (NASDAQ:DTV) continued to demonstrate strong growth in Latin America that contributed to DirecTV adding around 300,000 net subscribers and hitting 30 million total subscribers. Latin America has tremendous growth potential for pay-TV services where penetration is much lower than in the U.S. and where many of DirectTV’s competitors do not have a pay-TV presence in the region. DirecTV’s competitors include telecom companies such as AT&T (NYSE:T) and Verizon (NYSE:VZ) as well as satellite player Dish Network (NASDAQ:DISH) and cable operators like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). While the outlook in Latin America remains robust, the risk of another U.S. slowdown could hamper DirecTV’s growth in the region.

Our price estimate for DirecTV stands at $51.50 implies a premium of about 20% to the market price.

(Chart created using Trefis' app)

U.S. Debt Crisis & Netflix Expansion May Pose Some Challenges

If the U.S. debt crisis escalates, this would impact DirecTV’s Latin American expansion as consumers become more cautious on spending. The Economic Commission for Latin America has warned that Latin America could suffer from another U.S. debt crisis. [1] The commission states that this could have a significant impact on the level of global activity and demand of goods and services produced and exported by Latin America. [1] This would no doubt trickle down to the Latin American consumer who may be less likely to open his or her wallet for a new pay-TV service.

In addition to the ongoing crisis, Netflix’s (NASDAQ:NFLX) decision to expand into this region will also pose a threat. Netflix has the opportunity to tap many cost conscious consumers who might be willing to pay for a combination of Netflix’s streaming service at a cheaper rate than satellite TV. This could be true especially for lower income households and so DirecTV may lose out on these customers or at least face higher customer acquisition costs down the road.

However Growth so Far is Encouraging

Nevertheless DirecTV’s growth in key markets such as Brazil is coming from the middle market and is showing encouraging growth.

In the recent earnings, DirecTV announced that it passed 10 million subscribers in Latin America. Of the 823,000 gross subscriber additions, 17% were prepaid which compares to around 10% for its total Latin American business. So it seems that DirecTV is adequately addressing the middle to lower end of the market where there is ample room for growth as disposable incomes rise and pay-TV is one of the first aspirational purchases for many households. [2]

We believe that DirecTV will continue its growth in Latin America though we don’t expect average revenue per user (ARPU) to improve in the near term as the company focuses on broadening its footprint rather than driving ARPU. This implies a greater mix of new subscribers could be prepaid as we saw in the most recent quarter, and prepaid subscribers tend to have lower ARPU than postpaid subscribers. However, this footprint will help the company extend its brand in the region and could ultimately convert many of these new subscribers to postpaid plans over time.

You can modify our chart above to see how DirecTV’s stock may be impacted if subscriber growth in this region was to slowdown significantly.

Notes:

  1. U.S. debt crisis threatens Costa Rica, Latin America, ticotimes.net, Aug 9, 2011
  2. Earnings Transcript

Disclosure: No positions

Source: DirecTV Still Seeing Growth in Latin America