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Netflix May Find Latin American Growth Hard to Come By

Region's once-booming economies might be coming back to earth


Maybe Netflix Inc. (NASDAQ: NFLX) CEO Reed Hastings knows something about Latin America that has eluded everyone else.

The executive – who started Netflix because he was mad how poorly he was treated by then-dominant player Blockbuster – surprised Wall Street yesterday by announcing plans to expand his popular video streaming service to 43 countries in Latin America and the Caribbean later this year. Netflix, whose shares have surged almost 65 percent this year, wants to convince investors that it deserves its hefty price-to-earnings ratio of 83.12.

Wall Street analysts are understandably cautious about Netflix’s stock. Their price targets range from $80 to $316, and Netflix currently trades for $289.66. The Latin America strategy will not be enough to address these concerns. While broadband penetration rates in the region are expanding, so are worries that the once red-hot economies in the region are starting to buckle like their counterparts in other parts of the world.

“Latin America continues to grow at a healthy pace led by strong expansion in domestic demand,” according to a May report from the International Monetary Fund, which estimates the region’s GDP expanded at 6% in 2010 and will slow to 4.75%. “But the region is experiencing an excessively stimulative environment that brings along the risk of overheating.”

Shares of the iShares S&P Latin America 40 Index are down 3.29% this year as investors fretted about whether the high commodities prices and strong exports to Asia that sustained the region’s economic growth were sustainable. Many of the area’s high-flying economies are showing signs that they are mortal.

Take Brazil, the largest economy in Latin America. As Bloomberg News recently noted, economists there slashed their estimates for GDP growth for a second straight week from 3.95% to 3.94%. Consumer prices are expected to rise 5.1% next year, down from a previous forecast of 5.15%. The benchmark Bovespa index fell 10% during the first half of 2010 but has pulled back some lately. The MSCI Brazil Index Fund (NYSE: EWZ) has barely budged this year.

Mexico, whose economy expanded at its fastest rate in a decade in 2010, also is hurting. Its economy grew 2.4% in April, its slowest pace since November 2008, according to Bloomberg. Double-digit inflation and a rise in consumer prices might undermine the gains made in Argentina.

Colombia is the exception, growing at 5.1% during the first quarter versus a year ago. The Wall Street Journal reported that retail sales alone surged 23% in April. In May, the International Monetary Fund approved a $6.2 billion line of credit. “Colombia remains exposed to downside risks, including from severe commodity price fluctuations and other adverse external developments,” said IMF First Deputy Managing Director John Lipsky in a statement.

Netflix isn’t the only company with high hopes for Latin America.

SABMiller, the world’s second largest brewer, yesterday raised its forecast for volume from Latin America. The London-based company gets about 31% of its profit from the region, where it plans to expand further. Google Inc. (NASDAQ: GOOG) is keen on Latin America, as well. Earlier this year, the search engine giant said it had opened offices in Santiago, Bogotá and Lima and planned to add 500 workers.

Netflix, SABMiller and Google may find decent growth prospects in Latin America, though hardly the El Dorado some had expected.

Article printed from InvestorPlace Media,

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