4 Reasons To Be Bearish on Netflix

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Netflix (NASDAQ: NFLX) has been an innovator since inception, it went from being the pioneer in the DVD by mail category to completely altering the way consumers watch TV and movies via the Internet and that too, at a low price point. Recently, Netflix struck a number of solid content deals which removed investor skepticism significantly, as they would attract more subscribers. As a result, the stock had a strong run up and ended F'12 on a good note. Despite this newfound optimism, a deeper look at the factors that can negatively impact the company going forward is called for.  

Widening Losses in International Markets

Netflix is setting foot in a number of new countries to deal with dwindling subscriber growth rate in domestic markets. It currently operates in more than 40 countries, and is investing heavily overseas. Heavy capital investments in building operations and its content library are hurting the company substantially. In the Trailing Twelve Months (TTM), contribution losses from the International Streaming Business were in excess of $344 million, and are hurting Netflix's bottom line profits. If the fortune of the International Segment doesn't turn around quickly, it can further eat away the contribution profits of the Domestic Business which stood at $897 million in the last four quarters. 

Content Prices 

The increased competition for Internet TV has brought in a lot of cash rich competitors who are all bidding up content prices from various studios. The higher price of content will impact Netflix substantially as the company has to woo a greater number of paid subscribers to justify such pricey content deals. Netflix is rumored to have paid Walt Disney (NYSE: DIS) around $300 million a year. At a rate of $8 a month or $96 annualized, Netflix has to bring in at least 3.125 million new subscribers annually before it can realize any gains from the deal. To make matters worse, Netflix is issuing a lot of debt to fund incremental content costs, which if not managed properly could hurt its bottom line even more down the road. 

Lower Growth in Subscribers

Netflix is facing lower growth in subscribers especially in the U.S. as penetration levels amongst internet users in the country gains ground. And subscriber growth in the International Segment hasn't taken off completely. Also the entry of newer players in the internet subscription business can increase the number of voluntary cancellations (i.e. the churn rate) and impact Netflix substantially. 

Intense Streaming Competition

A number of media and internet powerhouses are changing course and entering the internet TV space with subscription based models from the pay-per-view and the regular TV category. Time Warner's (NYSE: TWX) HBO Go just picked up an exclusive deal with Universal Pictures for 10 years, which prevents Netflix from adding popular shows into its growing content library. But luckily for Netflix, HBO Go requires a pricey cable connection that can run up costs significantly higher than the $8 a month Netflix charges. Disney  backed Hulu Plus is also getting strong momentum and has more than 3 million viewers for the internet streaming service.

In addition to HBO Go and Hulu Plus, Amazon (NASDAQ: AMZN) can snatch a lot of subscribers from Netflix, thanks to a whole line of Kindle devices. Amazon's Instant Prime has recently signed a number of content deals, and is building out original TV content as well. Also, Amazon's LOVEFiLM is very well positioned in a number of European countries and has more than 2 million users. Coinstar  (NASDAQ:CSTR) and Verizon's partnership in launching Redbox Instant can also pose a lot of threats for Netflix's economic castle, as the Redbox Instant deal has the same pricing as Netflix and allows users to redeem four DVDs from the thousands of Redbox kiosks.

The Bottom Line

All in all, the rising competition from TV and internet based competitors can hurt the company's bottom line a lot more. Also, the exodus of subscribers from the higher margin DVD Business won't help either. Netflix is investing heavily for the long run, but in the process, the losses from the International Segment are hurting the company a lot, and will likely haunt it for a while. 

  


ishfaque has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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