NFLX Stock vs. the World – 3 Global Hurdles to Netflix Growth

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If you’re into timing the market, you might want to keep your stopwatch running on Netflix, Inc. (NASDAQ:NFLX) stock.

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Source: Netflix, Inc.

If you haven’t heard, Netflix recently surprised the world by bringing its streaming service to Cuba — announced, no less, via Twitter Inc (NYSE:TWTR) — effectively carving a new, if somewhat clunky, notch in Netflix plans for global domination.

Exciting? You bet… but then you’d be a speculator.

As Netflix dives into Cuba and other international markets like AustraliaJapan and China, it faces a slew of obstacles before the company can settle down and focus on what Netflix needs to do most — create original, compelling content to ward off competitors with similar contracts.

While Netflix has deep pockets to pull from, NFLX stock is going to take a dip if the company can’t meet it’s extremely lofty goals by the date it now set in stone.

That would be 2017.

Here are the three things intelligent investors should be wary of both in the short-term, and in the march to that all-important growth target a few years from now:

Cuba has a Dearth of Internet Access 

One market is not equivalent to the other. Simply because Netflix has Latin American experience does not translate into dealing with Cuba — a country so off limits to North American influence until recently that our government had to use a balloon off the Florida Keys to broadcast pro-democracy content which Cuba promptly scrambles.

So, here’s what you, with a position in NFLX stock, should worry about:

There are only about 5% of Cuban citizens with unfettered access to the Internet, and that access is highly restricted and costly to them. If Netflix wants to tap into this in a meaningful way, it needs to wow a great deal more Cubans to its service but would also need these prospective customers to be on high speed internet connections.

If there are 5% of Cubans who can potentially subscribe to Netflix, however, even if 100% of those sign up (and it’s not clear if demand is even there), that’s only a 563,500 additional users out of a total population of 11.27 million for the island nation. In other words, a 1% drop in the bucket that is currently 57 million Netflix subscribers.

Which means Netflix is growing, there is potential, but the growth is too slow to be relevant, and you shouldn’t be in the habit of gambling on the potential a potentially volatile short term for NFLX stock.

This Place Looks Familiar 

Let’s not forget that NFLX stock fell from a peak $295 to $64 thanks in part to the Qwikster debacle, but also because the company had trouble gaining a foothold across Latin America in 2011. As Gigaom writer Janko Roettgers put it:

“$8 may not be a whole lot of money in the U.S., but the same amount is a lot more significant in a country like Bolivia or Colombia, which are considered to be some of the poorest Latin American countries.”

NFLX stock floundered for all of fiscal 2012 and didn’t find its way ashore until 2013. But even after all this time, it hadn’t made notable progress in the Latin American market until late 2014. And even now, Netflix retains a 5.5% peak downstream traffic share, much lower than the 35% share it has in North America.

That’s in part because of connectivity concerns like Cuba, but also because of piracy concerns and a lack of user adoption to boot.

Even CEO Reed Hastings doesn’t sound too sure of his company, describing the need to be “very cautious” in emerging markets like China. The choice in words isn’t exactly befitting the confidence Netflix is putting in its incredibly ambitious expansion plans.

Netflix has Stiff Competition and Licensing Hurdles

Now, and here’s where things start to looking costly to NFLX stock holders: Netflix needs to get users to stream its original content if it hopes to maintain a decent profit margin. This dilutes the company’s focus, as instead of focusing solely on getting more hours of original content to its much larger and established user base, Netflix now has to spend money on entering these unproven and less stable markets.

To stream licensed content, Netflix pays an undisclosed flat fee agreed upon by the content holder, which Reuters pegged at up 700% in 2013 compared to only having to pay an almost negligible back end streaming costs for originals.

And, as Netflix says in its own investor relations FAQ, “In launching our service in a new international market, we must license a content portfolio for that country.”

Last, but certainly not least, is the competition from Sony Corp (ADR) (NYSE:SNE) and Time Warner Inc (NYSE:TWX), with a collaborative effort to launch a new streaming service, HOOQ, across Asia.

Mark my words, NFLX stock will wane before it starts to make any more considerable gains.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/nflx-stock-netflix-inc/.

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