Netflix Growth Threatened by Brexit?

As Britain voted to leave the European Union, Netflix Inc. (NASDAQ: NFLX) is worrying about its plans for global expansion. As financial markets all over the world crashed and market players run to safe haven assets, the online streaming giant also took a blow.

The Brexit can negatively affect the expansion of Netflix abroad, and the company is at risk because a significant part of its capital expenditures and growth ambitions are reliant on its stake in offshore markets. In the event of a demand slowdown or currency translations, the growth of Netflix will surely be hampered and it may even trigger another major sell-off. As of 6:37 AM GMT -4 pm on June 28, the stock of Netflix is changing hands at $85.33, down by 3.52 percent or 3.11. The streaming corporation’s shares have slumped by 5.5 percent ever since Britain left the European Union.

Nomura stated that Netflix is trading at 82x the firm’s forecast of 2016E EBITDA. However, as profit estimates fell because of the sluggish demand in Europe, there may be a “heightened negative impact on Netflix’s valuation.” The investment firm further stated that the NFLX stock could plunge up to 15 percent in a day if it under delivers on its forecasts and guidance.

In addition, there is also uncertainty regarding how regulations would change in the UK after it left the EU. Rules are also anticipated to change in the European Union since it was Britain that pushed for less strict regulations in the EU when it comes to technology, particularly from foreign companies. Because of the Brexit, the European Union might become stricter with international technology firms that might disrupt the smooth flow of operations in Europe.

RBC Capital has revisited that stock of the streaming giant after the Brexit and the firm’s overview stays largely unchanged. Mark Mahaney of RBC Capital restated his Outperform rating on the stock and set a target price of $140, indicating that Brexit should not greatly affect Netflix.

RBC Capital cites its survey from the previous quarter wherein the investment firm studied subscribers in the United States, France, and Germany. Mahaney is confident that the streaming giant’s growth is still intact.

According to the firm, Netflix still provides a “highly attractive global customer value proposition, a highly experienced and innovative management team, material profitability potential, and an increasingly strong competitive position.”

Furthermore, RBC Capital still estimates GAAP earnings per share of over $10 for the company by the end of this decade. The firm believes that this would open the opportunity for the NFLX stock to nearly double in the next 3 years.

Aside from that, RBC Capital stated that the revenue from the United Kingdom is approximately 5 percent of the total revenue, while the rest of Europe is responsible for roughly 20 percent of the overall revenue. However, the investment firm said that the value proposition that the streaming company offers to its clients become “even more compelling” when it has to cope with challenging economic situations. It is then when the strong pricing power and demand inelasticity of the corporation fully plays in.

Ultimately, the recent expansion of Netflix in international markets makes up for an immense revenue opportunity for the company.

Leave a Reply

Get Pre-Market Alerts!

Get Pre-Market Analysts' Upgrades, Downgrades, Earnings & Initiations with our FREE daily email newsletter.