Netflix to Tap Nordic Region

After expanding to Canada, Latin America, UK and Ireland, Netflix Inc. ( NFLX - Analyst Report ) recently announced its plans to expand the online streaming business to four Nordic countries of Norway, Denmark, Sweden and Finland by the end of 2012.

This would be Netflix’s fourth expansionary initiative after the company debuted in UK and Ireland earlier this year. We believe that the global expansion is a key revenue booster for Netflix as the company has been witnessing a slowdown in its domestic subscription additions.

According to a data collected by a Nordic statistical research group Nordstat, Nordic countries have a fixed broadband household penetration of 80% to 92%, higher than European Union’s average of 67%. Additionally, these countries also have a high level of mobile broadband penetration. We believe that these factors presents significant growth opportunity for Netflix’s streaming services going forward. .

However, stiff competition from Amazon.com Inc.’s ( AMZN - Analyst Report ) Lovefilm, and other online players such as Acetrax, a division of News Corp.'s ( NWSA - Analyst Report ) BSkyB is the primary concern. Nevertheless, we believe that Netflix’s varied content library will provide a significant competitive edge over its peers in the region.

Although international expansions are the key to Netflix’s growth story, increasing investments are expected to hurt profitability in the near term.

However, it is noteworthy that in the recently concluded second quarter, Netflix’s international subscriber base soared 273.2% on a year-over-year basis and now represents about 13.0% of its total streaming subscriber base.

During the second quarter of 2012, international revenue increased 242.1% on a year-over-year basis and 51.2% sequentially. This reflects strong overseas demand for Netflix’s services. We believe that Netflix’s focus on global expansion will drive top-line and profitability over the long term.

Our Take

Netflix remains a force to be reckoned with in the streaming market. We believe that Netflix’s improving content portfolio and international expansion are noteworthy.

Despite higher license renewing costs, we expect Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to strengthen its position over the long term.

However, higher capital expenditure and increasing competition compel us to remain Neutral on the stock over the long term (6-12 months).

Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating over the short term.