Netflix Season 2 Episode 1: Expectations For International May Be Way Too Conservative

Piper Jaffray said in a note on Thursday assumptions concerning Netflix, Inc. NFLX's international margin and penetration levels appear overly conservative.

Domestic Vs. International Growth Trajectory

For his comparative analysis, analyst Michael Olson compared the Netflix domestic streaming market penetration and margin trajectory to those of international streaming, with a starting point when each market reached 20 million subscribers. The rationale for taking the period when subscriber numbers hit 20 million was to reduce the potential variability.

The analyst noted that the company's domestic segment touched 20 million subscriber count in the third quarter of 2011 compared to the first quarter 2015 for the international segment.

Piper Jaffray pointed to the fact that the company now has a limited content offering outside the U.S. and has also done less marketing in many of the countries it entered in early 2016.

By 2020, the firm believes there is potential for market penetration higher than current estimates. While noting that Netflix had 51 percent penetration of broadband HHs in the 24 quarters after achieving subscriber count of 20 million, the firm said it has modeled only 16 percent penetration for international, excluding China, in the 24 quarters after adding 20 million international subscribers (which would be in 2020).

The firm clarified that the 35-percentage-point difference in penetration between the two markets at that point in their respective life-cycles appears large.

"One primary reason is that the competitive offerings outside the U.S. are less robust, so the potential to penetrate int'l markets, even with lower quality content and weaker brand awareness, is less of a challenge (vs. domestic) from a competitive standpoint," the firm said.

International Subscriber Base Expansion Likely

The firm also attributed its confidence concerning the international penetration to its survey of 1,000 broadband HHs in seven countries, which showed that 37 percent of the respondents claimed to be Netflix subscribers, while another 13 percent said they were not currently Netflix subscribers, but expect to be within six months. This, according, to the firm, signaled that 50 percent of broadband HHs in these countries are either current Netflix subscribers, or plan to be, later this year.

Summing up, the firm said, "While our Netflix EPS estimate is above consensus for 2020, it implies market penetration and contribution margin levels well below where domestic was at that stage in its lifecycle, suggesting we, and the Street, may be modeling 2020 profitability too low."

As such, Piper Jaffray maintains its Overweight rating on the shares and lifted its price target to $190 from $166, representing over 20 percent from current levels. That said, the firm indicated that it is not making changes to its current estimates.

In early trading, shares of Netflix were up 3.13 percent at $162.68.

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