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Netflix Isn’t Worth Watching

Netflix (NFLX) stock isn’t worth watching anymore.

I love that Netflix is expanding rapidly overseas. That’s the story the public doesn’t get. Over the last four quarters International (paid) Subscribers have grown from 1 million to 3 million. This number was zero in the September 2010 quarter. So from zero to a million to three million as of June 2012 — not even two years.

Netflix has some issues to deal with. Until some of these get resolved, the stock isn’t worth watching.

The problem is three fold:

  1. Movies are more expensive to obtain now. Amazon is stiff competition, yes I know, but still Netflix should have been able to compete as it is (was) the market leader. Cost of Revenue/Subscription rose from $428 million in 2011 Q2 to $583 million in 2012 Q2. That’s up 36% from a year-ago. Revenue rose only 13%. Therefore gross profit fell from $299 million to $246 million. Content is expensive.
  2. International expansion is yielding customers, but not profits. During the past two years  Netflix has grown International (paid) Subscribers from zero to 3 million but the company lost 90 million last quarter growing the business. So getting subscribers is working but making money off them isn’t. Expanding was easier in the U.S.
  3. Annual profit figures continue to get worse. We’ve known for three quarters now that NFLX would break even this year. We hoped 2013 would be profitable, but 2013 figures continue to erode. During the last year 2013 estimates have dropped from $4.46 to 2.59, then $2.19, and now $0.92. What’s next? Break even?

Sharek’s Take

Netflix is working on a big project overseas. The company is moving fast-and-hard to be the first market leader in countries like England and Ireland. Amazon’s competition and higher costs for content are eroding profits each quarter. This stock isn’t even worth watching until estimates stop falling.

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