Here are the three main questions this article will attempt to answer,
1.) If Netflix (NASDAQ:NFLX) has trouble generating profits, will continuing to create original content help the company in the short/long run?
2.) Can Netflix continue expanding at the rate it has been, or will competitors start to steal customers?
3.) Netflix has purchasing power offering the service at a cheap cost, but in the future Netflix must raise costs. Can the company do it without a massive loss of consumers like in the past?
1.) As Netflix prepares to double its budget for original content in 2014, it will bring back three popular original series for a second season; House of Cards, Hemlock Grove and Orange is the New Black. Although Netflix continues its tradition of releasing almost no metrics to the public (which in my opinion is an insult to investors), Chief Executive Reed Hastings claims:
"Orange is the New Black has been a tremendous success for us. It will end the year as our most watched the original series ever and, as with each of our other previously launched originals, enjoys an audience comparable with successful shows on cable and broadcast TV"
Trusting the executives, these shows seem to be popular among Netflix users, and add value to Netflix that competitors cannot match. The announcement of creating second seasons for these three popular original series will likely not draw in that many new subscribers, but will help retain old subscribers for the future.
Recently Netflix announced that it has partnered with Walt Disney Co. (NYSE:DIS) to bring four guaranteed Marvel super hero series exclusively to Netflix by 2015. If everything goes well, a fifth series will combine all four superheroes together, forming the Defenders. Each series will feature thirteen episodes that will only be aired on Netflix. This is a very interesting idea and could assist in the slow movement of TV series moving from cable to the internet.
Overall, this is Netflix's largest undertaking, and will help create a larger separation between Netflix and the competition. In the short run, this announcement will not help Netflix retain or add users since it will not be for over a year before any of the Defender shows begin to air. In the long run though, this could help retain users, and convince the millions of other superhero fans to join Netflix. Netflix will not be releasing all five series at once, instead one series will be released at a time over a period of a few years. Assuming that the series are well done and popular, this tactic will allow Netflix to remain relevant for years to come, keeping subscribers happy.
2.) Netflix's growth seems to be steadily increasing with 40.28 million total subscribers and 38.01 million paid subscribers. Netflix is forecasting domestic growth for both its paid and total subscribers in Q4 while predicting to take a loss on total subscribers internationally due to free trials expiring, while still growing Paid subscriptions internationally. Overall Netflix's international subscribers are growing at a faster pace than domestic which is expected. A figure that many forget about though is that two thirds of the world still does not have access to the internet. When internet access does arrive to the rest of the world, Netflix surely will not be the first purchase made, but if the price is right…
3.) Currently Netflix will run you $7.99 a month for the basic streaming service that allows two people to use one account simultaneously. For an extra $5 a month, you can add two additional members to the account allowing for four people to separately stream unlimited content. Competitors of Netflix such as Amazon Prime offer a slightly cheaper lump sum of $79 a year or $6.59 a month while Hulu Plus contends with Netflix at $7.99 a month.
As licensing costs continue to rise, Netflix and the rest of the online streaming community will have to raise prices. Historically, Netflix has not had success raising prices as they tried once in 2011 only to suffer a massive backlash losing nearly a million subscribers, thus causing the stock to fall from $300 to $60 in a matter of three months. It is a shame Netflix went about the original price hike so poorly since now it will only be harder for Netflix to do the inevitable, raise prices. Netflix has always struggled to become a profitable company, but with rising licensing costs and massive increases in original content spending, one is left to wonder how can Netflix possibly become profitable without raising monthly subscription costs. The answer is that it cannot, and eventually Netflix will have to raise subscription costs. It is likely that the entire online streaming industry as a whole will increase the costs around the same time, the question is who will go first.
There is no debating that Netflix is extremely overvalued, though we are in a new era of internet companies that no one has ever seen before. The rules are being rewritten every day as the market continues to reward companies that people enjoy using while ignoring financial facts. Netflix has experienced a massive crash in the past two years, and nothing is stopping that crash from being even larger this time around. In my opinion, Netflix is one of the riskiest investments that you could involve yourself in right now as they are notorious for releasing limited figures covered with misleading word play.
Over the past year, the stock has seen a rise of 329% increasing from $78 to $330. With a P/E ratio of 280.25, investors sure do have a lot of confidence that Netflix's future will be considerably brighter than ever. Personally I believe Netflix is a well-structured company that not only leads the Internet streaming industry, but also is innovating the future of television. That being said, the stock still risks facing a massive correction. That correction could happen just as easily tomorrow, or a year from now.
My advice is to not go near this stock until that correction occurs. I will leave you with a quote from Netflix's Q3 letter to shareholders that sums everything up fairly well,
"Despite the huge swings in our stock price since our 2002 IPO ($8 to $3 to $39 to $8 to $300 to $55 to $330), we've continued to grow our membership every year fairly steadily. We do our best to ignore the volatility in our stock."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.