Netflix, Inc. European Expansion Overall Good, But With Few Headwinds

Netflix, Inc. (NASDAQ:NFLX) has entered into new markets, based on this a report dated September 15, 2014 from Morgan Stanley analysts (Benjamin Swinburne, Hersh Khadilkar and Thomas Yeh) expect higher international subscription in the fourth-quarter of 2014 and beyond on the back of six new markets, where the company expands this week.

Factors in favor of Netflix

On the basis of the third-quarter guidance for paid vs. total subscribers, new geographies are expected to add over one million of non-paid net adds in the last two-weeks of September. Factors that are expected to give a head start to Netflix in these markets are season strength in the existing markets and the advantage of a full-quarter in the new markets.

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Performance of Netflix will largely depend upon the global membership scale. The company has shown better performance in the United States and initial markets, which is a strong base for the success in the new markets, and should allow the company to leverage content investments and take margin growth further. With increasing braodband penetration across the world, Netflix would get an opportunity to cater to a larger user base, driving member growth and offering better opportunity for new market launches, believe analysts.

Challenges for Netflix overseas

Although, the online video streaming company enjoys the confidence of the market and analysts to expand its subscriber base, Morgan Stanley analysts have lowered their revenue expectations for 2015 and beyond. Reasons they cited for this conservatism is the changing VAT norms in European Union from the point of consumption to the point of origin. Also, recent USD strength compared to Euro will pressurize the international ARPU in the short-term.

To counter Netflix, pay-TV distributors are planning aggressively on TV Everywhere capabilities. In France, rival Canal Play has over 500K subscribers while both Numericable and are planning to come up with SVOD services. In Switzerland, UPC Cablecom has come up with a subscription on-demand service, and in Belgian the cable operator VOO plans similar service with BeTV. In long-term, analysts expect lower penetration rates for Germany and France.

Year to date, Netflix shares are up over 30%, however, international ARPU headwinds may result in some short-term pressure, believe analysts. According to analysts, such headwinds provide an opportunity to buy the stock as the streaming company is expanding overseas, which holds a lot of potential.

Morgan Stanley has assigned Overweight rating to the stock with a price target of $520.