Netflix (NASDAQ:NFLX) provides physical DVD and Internet streaming of movies in the United States and internationally. Streaming can be accessed by computers, mobile devices or portable setup box. Netflix faces many challenges and an uncertain future. In September 2011, Netflix has spun off its DVD business into another entity since it was becoming less profitable. DVD and streaming was priced at under $10 had increased by 60% to $16. The increase price forced subscribers to cancel memberships as Netflix lost 800,000 accounts. More competitors have entered the space for content has forced studios to increase the price they charge for content. In 2010, Netflix paid $180 million for content versus an estimate of almost $2 billion in 2012. Costs continue to rise as Netflix has signed contracts for $3.6 billion for licensing rights to TV shows and movies. Netflix has reported 26.1 million US subscribers but most are signed to lower margin internet streaming business.
Competitors such as Comcast, Amazon, and Redbox compete in the space making the domestic market saturated that Netflix has to expand internationally. International revenue growth came at a cost as Netflix has reported losses in recent quarters versus solid earnings in recent quarters (although the reported a profit in the mrq). In September 2010, Netflix expanded into Canada, September 2011, expanded into Latin America and the Caribbean, and January 2012, expanded into United Kingdom and Ireland. The company has been losing money as it spends to gain momentum into international markets. The stock price has been hit tremendously as investors fear the company can't turn a profit. Netflix needs to work on turning the increased revenue into actual profits.
International subscribers have gained some momentum since in 2012, 3.62million subscribers signed up in less than 2 years. That's about 4X more than in 2011. Netflix continues to invest in the international market which has hurt profits but grown revenues to compete against the domestic market. The mrq Netflix reported a profit of $.11 vs prior quarter of $.08 loss shows international growth is gaining momentum and 1st quarter investment in UK & Ireland was the last investment for the year. 2012 will be a profitable year to Netflix although continued challenges remain.
Some assumptions: increases content costs, have to increase prices as you offer more content, costs go up increase prices will equate to less growth in number of subscribers but Netflix is still growing. Netflix strategy is to gain market share by offering the most content for a reasonable price. Its not the best content since studios won't let Netflix stream new releases since they can command a premium price. Domestic market is still growing but at a slower pace so international market is fueling revenue growth. 2010 represented .17% of revenue, 2011 represented 2.6% of revenue, 15X increase and look for 2012 revenue to represent close to 10% of revenue.
Looking forward, NFLX has signed a content deal with Disney not to take affect until 2016 and CArl Ichan has taken a stake in the company using options. NFLX is a long-term buy at this point as speculation of a buyout for this company is inevitable. Looking at the amount of subscribers they have, this is monthly generated revenue thats a cash flow generator that firms like private equity firms cant ignore. Even a Comcast, AT&T, or Verizon would make sense. Competition isnt around as nobody has the library that NFLX has at the convenience of your home television. As more people subscriber to NFLX service, less people are subscribing to cable or satellite television comparing $8 vs $40-50/month. MSFT could add this to there balance sheet because they're flush of cash or maybe an AAPL whom is showing some signs of wear and isnt growing as fast anymore. The reason this firm is so unique is its subscriber base used as a mobile strategy for large firms to either get into the space of expand on the existing mobile market. This is an added bonus to XBOX live or to AAPL mobile market. The international growth is another increasing factor that no other firms have the footprint that NFLX does.
Disclosure: I am long NFLX.