Netflix, Inc. (NASDAQ:NFLX) announced this week that it is expanding into Australia and New Zealand, so now analysts are adjusting their estimates. The video streaming company’s total addressable market will grow with the expansion, as will its international expenses.
Netflix’s international expenses on the rise
In a report dated Nov. 19, 2014, Nomura analysts Anthony DiClemente and Ron Zember said it makes sense for Netflix to expand into Australia and New Zealand. After all, the company said it intends to “expand as quickly as possible while staying profitable on a global basis, as long as there are compelling markets to expand into.”
Of course with expansion comes increasing expenses, so the analysts are increasing their assumptions on international costs, which result in a decrease in their earnings per share estimates.
Effects of Netflix’s expansion efforts
The Nomura team said the Australia and New Zealand expansions bring just a minor increase in total addressable market compared to this year’s expansion in Europe. The analysts estimate that with this year’s expansion into Austria, Belgium, France, Germany, Luxembourg and Switzerland, Netflix added about 60 million broadband households to its total international addressable market, bringing it to about 160 million.
They estimate that entering Australia and New Zealand adds only about 7 million broadband households to Netflix’s total international addressable market. They assume about a 15% penetration rate by the end of next year, so they’ve bumped up their estimate for international subscribers to about 25 million for next year.
Adjusting earnings estimates for Netflix
The Nomura analysts note that Netflix saw about $40 million in incremental launch costs in the first quarter of 2012 in connection with its U.K. expansion. They add that Australia and New Zealand bring a little over a third of the U.K.’s number of total broadband households. As a result, they’re estimating that expanding into that region will result in about $14 million in incremental costs from the expansion.
This estimate, plus slightly higher assumptions for core international costs, led them to increase their estimate for international operating losses next year to $216 million. That’s compared to their estimate of $176 million in international losses for this year. Their 2016 estimate for international operating losses also rises slightly to $41 million.
Netflix faces competition from Presto
As Netflix expands in to Australia, it will face increased competition from Presto, the leading Australian video on demand service. Recently Presto slashed its monthly subscriber fee from AU$19.99 to AU$9.99, which puts it in line with Netflix in terms of monthly fees.
However, the Nomura team notes that Netflix does offer more content than Presto because it also offers TV content in addition to movies, while Presto only offers movies. After adjusting their estimates, they maintained their Neutral rating and $390 per share price target on Netflix.