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Netflix 'struggling' to remain profitable, analysts say

June 12, 2012 | By Chris Rizo

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Netflix Inc. (Nasdaq: NFLX), the world's largest online-video subscription service, is poised for decreased profitability amid rising costs of content and fierce competition, financial analysts said this week.

The Los Gatos, Calif.-based company, which boasts of having over 26 million subscribers, is a "business in transition," according to Chicago-based investment-research provider Valuentum Securities Inc.

Though it has a significant number of subscribers, the company is "struggling to remain profitable," Valuentum said Monday, nothing that Netflix has to pay hundreds of millions of dollars to increase its content offerings.

"Over the long term, we think the content creators will be able to charge higher prices to Netflix, making it even harder for the company to become profitable," analysts said. "We'd stay away from Netflix because the rising costs of content, and fierce competition from Apple (Nasdaq: AAPL) could really impair profitable growth."

This morning on the Nasdaq, shares of Netflix open at $63.00, a far cry from the stock's 52-week high of $304.79 last July. For the first quarter of 2012, Netflix reported a smaller-than-expected loss of 8 cents per share on $870 million.

Driving Netflix's content costs is competition from content-streaming companies and others, analysts said, noting that website and over-the-top (OTT) subscription service Hulu, HBO Go, and Microsoft's (Nasdaq: MSFT) Xbox all vie for the same dollars.

"[W]e think the company will have to pay more to acquire exclusive content or receive content before competitors," the Valuentum analysis reads. "Ultimately, for a company struggling to remain profitable, we are unsure whether Netflix will be able to beat out some of its deep-pocketed competitors."

Comcast (Nasdaq: CMCSA), for instance, "is even rolling out more extensive online offerings for its cable customers," analysts noted.

Netflix, to diversity its offerings, recently begun creating original content--a pushback against competitors that Valuentum said "could be quite expensive."

In February, the company launched its first original, Lilyhammer, and next year the company plans to add four Netflix Originals. Among them: a comeback of the cult classic Arrested Development.

Netflix's widening original-programming endeavor is something of a gamble, Valuentum said.

"In this sense, we see the company trying to copy HBO's push to evolve from being just a content provider. However, Netflix runs the risk of developing expensive shows that consumers do not like, and the firm doesn't have the reputation that HBO has for developing and producing great content. That said, if Netflix can replicate HBO's success, we think it can drive subscriber growth and add value to the brand. Starting with a show that resonates with a large group of devoted fans is a low-risk move, in our view."

In 2011, Netflix spent $1.8 billion on licensing, acquiring and delivering content, a U.S. Securities and Exchange Commission filing indicates. The company's programming costs last year jumped 55 percent over its 2010 content costs.

For more:
- read the Valuentum analysis (sub. req.)

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