Since the time UK has made its decision to leave European Union, Netflix, Inc. (NASDAQ:NFLX) shares have suffered sharp losses as the stock plummeted more than 6%, hitting a 4 ½ month low price. This happened because investors were concerned that the US streaming giant will suffer from collateral damage from Brexit.
On Tuesday, Netflix stock jumped more than 3% after an analyst at RBC Capital Mark Mahaney issued his research note to investors. According to the analyst, Netflix investors continue to underestimate and underappreciate the company’s stable growth potential. Mr. Mahaney believes that the Brexit tremor has in fact created a good buying opportunities for tech stock investors.
The analyst wrote: “Netflix still offers a highly attractive global customer value proposition, a highly experienced and innovative management team, material profitability potential and an increasingly strong competitive position.”
He further added that he believes that the consumer value proposition behind Netflix actually become more convincing during challenging economic conditions, as the similar trend was witnessed last year in the US recession.
It is still not certain as to how the regulations in UK would change after its exit from European Union. UK has always pushed for less strict rules and regulations in the EU when it comes to technology from foreign companies. It is likely that although UK regulation stays the same, EU might become stricter in terms of regulations associated with its international technology firms that might cause disruption in the smooth flow of operations in Europe.
The UK is the fourth-largest country in terms of revenue for the streaming giant. As per FactSet estimates, it ranks just behind US at 71%, Japan at 4.3% and Germany at 3.5%.
Last year from UK, the video streaming provider collected nearly 3% of its revenues, as per FactSet estimates and overall it earned 16.4% from Europe. This contribution is expected to increase as Netflix has been expanding its services aggressively outside US, which can be seen from its massive launch in over 130 new regions earlier this year.
In the latest quarter earnings, the company’s international streaming revenue surged 57% on year-over-year basis to $652 million, as the share of overall revenue rose from 30% to 36%. Meanwhile, Netflix domestic streaming revenue grew 18% during first quarter.
The high valuation of Netflix stock is anticipated on a “red-hot” growth rate, powered by this international expansion. However, due to this, Netflix is exposed to significant foreign currency headwinds. This is because a stronger dollar hits the revenue generated in the international market when it is converted into US dollars. Not only this, stronger currency also makes its service more expensive for overseas consumers, which means there is a risk that these customers might shift toward cheaper alternatives.
In a research note, analyst Laura Martin at Needham & Co. told investors: “Netflix is also at risk because all of their growth story and capital investment is offshore.”
Irrespective of its geographical location, Netflix is determined that it will be able to gain much larger share in its international market due to its original and exclusive content. Several analysts believe that through spending broadly on its content, US streaming giant has the ability to rapidly learn and drive subscriber revenue growth even in its new international markets.
According to the media company, in the upcoming quarters, Netflix will add more local languages, payment methods, customer support, and contents in order to facilitate its international subscribers.
Though there has been a substantial increase in streaming giant’s cost since it started to invest more toward its exclusive and original series, many analysts believes that the online video service provider has the ability to generate returns through this content spending.