Netflix, Inc. (NASDAQ:NFLX) is aggressively expanding its business in international markets. The Internet streaming company plans to foray into six European countries this year, including France and Germany. Many on the Wall Street argue that Netflix’s international expansion is hurting its profits because it has generated $800 million in contributed losses for the company in the past four years. But RBC Capital Markets analyst Mark S. Mahaney sees significant “hidden” valuation upside, thanks to its international strategy. RBC Capital Markets has an Outperform rating on the stock with $500 price target.

Netflix ISPs

Netflix has the ability to make its international businesses profitable

The $800 million in contributed losses is a big amount considering Netflix, Inc. (NASDAQ:NFLX) has generated $3.3 billion in contributed profits in the U.S. during the same four-year period. International investments have clearly hurt the Los Gatos-based company’s profitability. Netflix has a relatively high multiple of 26x RBC’s 2015 EBITDA estimate of $821 million. However, Mark Mahaney says that the international expansion cost of $275 million is negatively affecting RBC’s EBITDA estimate.

What many investors seem to be ignoring is that Netflix, Inc. (NASDAQ:NFLX) is that the company has proven that it has the ability to make many of its international businesses profitable. The company did it in the Canadian market.  During the latest quarterly earnings call, CEO Reed Hastings said that the rest of Netflix’s international operations are on track to break-even by the end of 2014.

Netflix is much less expensive than it looks

In contrast, the Wall Street and RBC Capital Markets itself have increased their estimates for international losses in FY2015 after the company’s decision to expand in new European markets. That makes it a bit difficult to assess the company’s organic profitability. So, Mark Mahaney analyses Netflix, Inc. (NASDAQ:NFLX) in three different valuation frameworks. One, eliminating international losses in 2015, which is possible if the company doesn’t undertake any more international launches. Two, international margins in line with the U.S. EBITDA margins of 21%. And three, international and U.S. EBITDA margins reach a “peak” of 30%. Notably, HBO has close to 40% EBITDA margin.

Netflix

These scenarios represent “hidden” valuation upside as shown in the image above. It indicates that Netflix, Inc. (NASDAQ:NFLX)’s organic valuation is much less expensive than it appears using published estimates. The Internet streaming company currently has more than 48 million subscribers in 40 countries.

Netflix, Inc. (NASDAQ:NFLX) shares jumped 0.73% to $394.65 at 11:32 AM EDT on Friday.