In the last quarter, Neftlix (NFLX, Financial) announced that it had launched its service in a few more European countries, namely Germany, France, Austria, Switzerland, Belgium and Luxembourg. This came as a surprise to investors who are now keen to find out what advances the company has made into Europe as far as the update is concerned, and how it has impacted the top and bottom line of the company. The company has been successful in its expansion program into Latin America and other European markets. Now it’s important to find out if this management decision taken in the last quarter has really benefitted the company is in the long run. Let’s dive in to check it out.
What does this expansion mean?
The company has been successful in expanding in Latin America and some of the European markets which have resulted in rapid top line growth, as total international streaming members have more than doubled since June 2013 from just 7.8 million to 16.2 million members.
Though the international margins remain tight, the international contribution margin has improved significantly from -40% last year to just -5% as of second quarter of 2014.
With the launch of the company’s service in so many countries at one time, it can be expected that an increase in such marketing costs could put pressure on its margins which is likely to remain low until the third quarter of 2014 and remain there until the initial rampup phase has been completed.
But surely it will have some positive impact on the company’s top line within the upcoming quarters.
A glance at the financial core
As domestic streaming margins remain at their peak levels in excess of 27% and is expected to remain high in the next few quarters as well, there is no competition risk for the company in the short term. Domestic revenue growth will likely remain stable in the 4% to 5% range, over the next few quarters.
The consensus analyst estimate for revenue and earnings implies some contractions in the gross margins, which is likely driven by the company’s expansion plans. According to analysts, the stock has traded in the range of 82x to 95x over the last 12 months. If we assume that Neftlix is able to maintain a 25% year-over-year revenue growth rate and around 8% operating margin, it might be able to generate earnings per share of $6.57 a share by 2015.
Analysts are opining that Neftlix remains a great investment option, as it enters into the third quarter earnings call. As the European economy is showing only gradual signs of revival, we can assume that Neftlix will see around 20% growth rate in 2015 compared to the consensus estimate of 25%. Now, that the company has moved into more European countries, this might be to make up for the growth rate which needs to move up a notch for Neftlix to remain a profitable business.
Final word
As the U.S. internet streaming giant is trying to improve its international presence, surely it will impact the top and bottom line in the long run. Having been established in 1997, the company has been able to pull subscribers from around 40 countries by the third quarter of 2014. Now, it’s venturing into the unreached destinations for further expansion of its services. The improvement of subscriptions will help to lift Neftlix’s fortunes in the next quarters for which investors need to stay tuned and wait for the financial numbers to get reported for the third quarter of 2014 to begin with that would be released today on the October 15.
