Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Netflix Shortchanging Its Subscribers?

File this one under "You can't please all of the people all of the time." After years of catching flak from Wall Street for spending too much on content, Netflix (NASDAQ: NFLX  ) is now facing questions about spending too little.

In fact, the question that opened this week's earnings release call was from an analyst who asked, "How do you think about the risk of allowing domestic margins to rise too quickly, for example [in] attracting more competition or underinvesting in future growth?"

That's right, there's at least one Wall Street firm out there that's worried about a company's profits rising too quickly.

But the question actually raises a good point. Netflix's streaming margins in the U.S. have grown much faster than even the company expected.

Source: Netflix financial filings.

That's one big benefit of having your subscriber base grow faster than your expenses do. Still, that pace of profit expansion is twice the 1%-per-quarter growth that management has targeted.

And it's true that those kinds of profits will attract plenty of competition. Coinstar (NASDAQ: OUTR  ) and Verizon's (NYSE: VZ  ) new Redbox Instant service pairs DVD rentals with online video, and it just started taking paying subscribers. Verizon sees the project as having the potential to boost profits starting next year.

Other streaming rivals like (NASDAQ: AMZN  ) and Hulu have been bidding so aggressively for content that they've driven up prices for streaming titles, according to Netflix CEO Reed Hastings. Amazon isn't planning on slowing down on that pace, either. CEO Jeff Bezos just told shareholders that the company's "heavy investments" in digital media are a key part of its long-term strategy to improve the customer experience.

As for the risk to future growth, that's also worth worrying about. After all, the big reason that Netflix's membership additions have been so strong is that the company has spent billions to beef up its library. Netflix doesn't want to kill that virtuous cycle by passing on popular but expensive content just to boost short-term profits.

But I don't see Netflix falling into that trap. Instead, it just looks like the company's push into original content like House of Cards has made the service more engaging for existing members, and an easier sell to new ones.

Netflix hasn't slowed the pace of fresh content deals, having recently spent hundreds of millions on titles from Disney, Hasbro, and DreamWorks. And there are plenty more exclusive, original series in the works for this year and next. As long as those major deals keep coming, there's no reason both subscribers and shareholders can't be happy with Netflix's content investments.

Don't get shortchanged
The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2013, at 8:24 PM, AceInMySleeve wrote:

    It seems dramatic until you look at how little other existing companies spend on content.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2381521, ~/Articles/ArticleHandler.aspx, 9/30/2016 12:54:53 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,332.09 188.64 1.04%
S&P 500 2,170.07 18.94 0.88%
NASD 5,317.74 48.59 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 12:38 PM
NFLX $98.94 Up +2.27 +2.35%
Netflix CAPS Rating: ***
AMZN $838.66 Up +9.61 +1.16% CAPS Rating: ****
OUTR $0.00 Down +0.00 +0.00%
Outerwall CAPS Rating: **
VZ $52.26 Up +0.14 +0.27%
Verizon Communicat… CAPS Rating: ****