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Time For Reality Check On Netflix, Inc. (NASDAQ:NFLX)

Written by on June 10, 2015
Should you invest in Netflix, Inc. (NASDAQ:NFLX)? Is it going to just keep growing and become more profitable over time?
People would have you believe that that is what is going to happen.

Netflix Is Profitable

One thing to be said in favor of Netflix is that it makes a profit. In the latest 1Q2015 results, it reported a slim net profit of $24 million on a turnover of $1.4 billion. The company enjoys a P/E ratio of 175 and has a market capitalization of $40 billion. Netflix has nearly 60 million domestic and international paid subscribers (and growing) out of whom two-thirds are domenstic and one-third international.
Netflix has a turnover of $5.5 billion for FY2014 with net income of $266.8 million.
Netflix stock is hitting all-time highs practically every day and is now trading above $683 per share. It has gained more than 17% in the past one month, more than 55% in the past three months, and nearly doubled in the past six months. An impressive show.
All of this year has been good for the Netflix stock with strong rallies around the time of the quarterly results.

Some are predicting that Netlifix stock will reach $1,400 in five years mainly on the back of international expansion.

Netflix hopes to enter 200 markets (countries) by the end of next year and people are predicting 150 million total Netflix subscribers five years from now.

Netflix Revenue And Profit Projections

Netflix is yet to enter major international markets like Japan, China, and India. While it has firm plans to enter Japan in the fall and is negotiating to enter China, India is not yet on the radar. With a 300 million strong English speaking population, India probably has the world’s second-largest number of English speakers.

But there is the question of demand. How many customers can Netflix get with its current price of $9.99 a month for new subscribers?

At roughly $100 per annum at current prices, if Netflix can get 150 million subscribers, it will have revenue of $15 billion; and if it steadily increased prices to around $12 a month, it can look at a revenue of $22.5 billion if it gets 150 million subscribers.

The Netflix Imponderables

Much of the world is not ‘developed‘; while the U.S., Japan, and Western Europe have about 800 million people who are mostly well off, the rest of the world has slim pickings in terms of an affluent populace.

So, it’s not sure where Netflix will get its numbers from. Assuming its U.S. subscriber numbers plateau at around 60 million and European subscribers reach 40 million, it will need another 50 million subscribers from the rest of the world and that may be a tough target.

The Netflix Challengers

The reason why Netflix’s growth may slow down sooner rather than later is because there is growing competition with a plethora of online streaming companies out there now and more planning to enter the business.

Amazon Prime, CBS All Access, HBO Now, Showtime, Sone Vue, to name just a few. Apple TV will likely launch its own service and more might join the fun too as viewing habits change and broadband internet availability grows around the world.

Once the likes of HBO and Sony and others join the bandwagon, Netflix will find it tough to compete with them on the basis of stellar content.

For every House of Cards that Netflix has, HBO has Game of Thrones and much more.

And when content owners start their own online streaming, they’ll have less reason to share their content with Netflix for a fee.

No wonder Netflix is getting more and more into original content production — the latest being a movie deal with Brad Pitt.

Will the four movie deal with Adam Sandler and the continuing craze for Orange Is The New Black be enough to push Netflix’s fortunes forward or will the entry of the competition lead to a fragmentation of the market and subscribers will be picky about which streaming service provider they choose to go for?