Netflix's Europe expansion seen eating into profits

Reuters News
Posted: Jul 22, 2014 9:27 AM

(Reuters) - Netflix Inc's planned expansion in Europe would set the video streaming company up for growth, but would increase content and marketing expenses in the near term, analysts said.

The company's shares were set to open down about 2 percent at $442.19 on Tuesday. Up to Monday's close, the stock has nearly doubled in the past year.

At least 14 brokerages raised their target price on the company's stock by as much as $75 to a high of $550 on Tuesday, a day after the company said profit more than doubled in the quarter ended June 30.

Netflix said it planned to expand into Germany, France, Austria, Switzerland, Belgium and Luxembourg in September, taking its international addressable market to more than 180 million broadband households — double the current U.S. market.

"The launch into the six new European markets appears costlier than anticipated," Janney Capital Markets analysts wrote in a research report.

Netflix, which now has over 50 million subscribers, is already present in European countries such as the UK, Denmark, Norway, Sweden and Finland.

The company added 1.12 million customers in international markets in the second quarter, more than the 570,000 customers it added in the United States.

Netflix's international business was likely to post losses or stay in "early-stage margin mode" for the next several years, RBC Capital Markets analysts wrote in a research note.

RBC forecast that longer term, the business' margins would be similar to that in its U.S. business, which the brokerage said was 27.9 percent in the latest quarter.

RBC kept its "outperform" rating on the stock and raised its price target to $530 from $500.

Of the 37 analysts covering Netflix, 18 have a "buy" or a higher rating on the stock, 14 have a "hold" and 5 have a "sell" or equivalent rating, according to StarMine data.

Netflix has invested in original series such as "House of Cards" and the Emmy-nominated "Orange is the New Black" to square off against competition from Inc and Hulu.

"While we believe in the product and the potential for the company longer-term, we have reservations on current expectations and what is implied in the current stock price," Barclays Equity Research analysts wrote in a client note.

Barclays kept its "underweight" rating and $420 target price on the stock.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Savio D'Souza)