Why Growth In Latin America Matters For Netflix

The Street is divided over the impact streaming competition will have on Netflix Inc NFLX.

Netflix will thrive despite a flurry of new entrants, with its success in Latin America offering a preview of potential success in other emerging markets, a Morgan Stanley analyst said Thursday.

The Netflix Analyst

Benjamin Swinburne reiterated an Overweight rating on Netflix with a $400 price target.

The Netflix Thesis

Latin America has been Netflix's fastest growing region, with the territory adding 650-700 basis points of annual penetration gains, Swinburne said in a Thursday note. (See his track record here.)

This is higher than the peak U.S. growth Netflix achieved in 2013 and comes from a region characterized by lower per capita income, lower pay TV penetration and a less developed but improving payment system and telecom infrastructure, the analyst said.

Netflix boasts 40% penetration of broadband households and 15% penetration of total occupied household in the region, he said.

If Netflix can replicate its Latin American success in Europe, the Middle East and Africa, which has 130 million broadband households, and in the Asia-Pacific region, which has 160 million broadband households excluding China, Swinburne said he estimates that 10 million net adds per year can likely be achieved over Morgan Stanley's base case assumption.

Some of the factors that have contributed to Netflix's success in Latin America — such as a younger population, higher pay-TV prices and Netflix's investment in local content and partnerships and some local hits — also apply to emerging markets, the analyst said.

The differences are much lower pay-TV prices, especially in parts of Asia, and the problem of western content that is less likely to resonate with the local audience, he said.

Netflix is striving to address these limitations by aggressively ramping its local content production, particularly in large Asian markets, according to Morgan Stanley.

Despite the launch of Apple Inc.'s AAPL Apple TV+ on Nov. 1 and Walt Disney Co's DIS Disney+ on Nov. 12, Netflix shares have rallied over 25% since Oct. 1, Swinburne said.

"We continue to believe that Netflix scale and spending levels put it in a fundamentally different market position with larger long-term revenue goals than both of these competitors, as well as HBO Max and Peacock."

If emerging market growth approaches Latin American levels going forward, Morgan Stanley projects nearly 60% upside to its bull case price target of $535.