Where You Should Expect To See Effects Of Netflix's Breakthrough In China

Netflix, Inc. NFLX announced this week it will enter the Chinese market through a partnership with the country's biggest streaming platform, iQIYI. The announcement helped boost Netflix's stock higher by nearly 6 percent, as the entrance into the very large (but also very censored) market is seen as a major positive.

A Fortune report noted Netflix's entrance into China is both "risky" and "relevant." On the one hand, Netflix will have to deal with the government's strict control of all media and entertainment content as well as its preference in helping local companies over international peers.

On the other hand, China is the world's most populous country and boasts the world's second-largest economy. Perhaps more importantly, the Chinese people are on par in terms of the rest of the world in technological trends, including accessing entertainment online through streaming platforms.

Impact For Shareholders

Loop Capital Markets' David Miller commented in a report on Wednesday that Netflix didn't disclose its activities in a press release, which was "a little odd." Nevertheless, the news does remove a major overhang investors have held on to since early 2016 when the company announced a worldwide expansion with China being a notable country absent.

Miller also highlighted that Netflix won't record its new Chinese operations as it does with other international countries. Instead, Netflix will book all licensing revenue as a contra expense, which will offset the already-established content costs.

As such, the analyst is assuming Netflix's total revenue for both 2017 and 2018 will remain the same as before, but the Chinese deal will impact the company's earnings per share. In other words, Netflix's entrance in China is different from its traditional operator status and won't increase revenue in the traditional sense and will be contra entry only.

Miller boosted his 2017 earnings per share estimate from $1.02 to $1.06, while 2018's was moved higher from $1.80 to $1.84.

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