Credit: Shutterstock photoAs Wall Street realizes that Neflix (NFLX) is much more than just a platform for having content and is increasingly looking like the way to own content, the company's plans may be bigger than even the most bullish on Wall Street first anticipated.
Netflix has more than 63 million subscribers, including more than 40 million in the United States, but it's the company's international opportunity that is the key, noted Goldman Sachs analyst Heath Terry.
"We estimate that Netflix’s international total addressable market will more than double to 460 million by 2020 as Netflix expands and the distribution ecosystem continues to grow," Terry wrote in a note. "With 24% penetration globally by 2020, Netflix could reach 112 million international subscribers vs. 21 million in [the first quarter of fiscal year 2015], while the domestic market reaches 65% household penetration or 69 million subscribers vs. 41 million."
Terry kept his buy rating on shares and raised his price target to $780 ahead of earnings, which are slated for Wednesday after the close of trading.
For the second quarter, analysts expect the company to earn 31 cents a share on $1.648 billion in revenue.
The company's international plans started in 2010 with Canada.
From there, it's expanded to Latin America (Sept. 2011), the UK and Ireland (Jan. 2012), Norway, Denmark, Sweden and Finland (Oct. 2012), the Netherlands (Sept. 2013), France, Germany, Austria, Switzerland, Belgium and Luxembourg (Sept. 2014) and most recently, Australia and New Zealand in March of this year.
Netflix has been working hard to add original content to the content it purchases, including shows like Orange Is the New Black, House of Cards, Marco Polo and a host of others.
Terry believes that since the content costs are fixed, there's the potential to generate not only more subscribers, but increase the average revenue per user, ultimately boosting margins.
"We expect aggregate operating margins to reach 19% by 2020 (from 6% in [the first quarter of fiscal year 2015]), as both US and International benefit from scale across all expense lines," Terry wrote in the note.
By comparison, HBO, owned by Time Warner (TWC) and the company Netflix references most often as its main competition, had operating margins of 33% in the first quarter of 2015.
Much of Netflix's international growth may come from China, where the company is reportedly looking to enter in the next couple of years. Terry believes the revenue from outside the U.S. is set to grow at an annual rate at 58% over the next three years, compared to just 19% for the United States. As this happens and the company continues to become a fixed cost business, there's the option for margin expansion, a large reason why shares have rallied more than 100% this year.
"The company’s superior distribution model (no revenue splits with cable operators), should allow the company to spend incrementally more on marketing and content as it grows, while leveraging its data advantage to make that spend more efficient," Terry wrote. "As it matures and content costs as a percentage of revenue declines, margins should exceed those of comparable traditional content distributors."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
