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3 Things Netflix Still Needs to Get Right

By Rick Munarriz - Jul 18, 2017 at 10:10AM

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The streaming darling reports blowout second-quarter results, but it's not perfect.

Netflix (NFLX -0.58%) came through with another blowout report on Monday, and the market's rewarding investors by pushing the stock up to a new all-time high. The leading player in premium video streaming seems to be doing everything right these days. It's growing revenue at a healthy clip with improving margins pushing earnings even higher. The platform is a true globetrotter, and international subscribers just eclipsed its stateside user count.

This doesn't mean that Netflix is perfect. There are still a few areas where the dot-com darling can improve. Let's go over a few of the issues that the market's setting aside in Tuesday's otherwise well-earned rally.

Kevin Spacey in House of Cards in a salute.

Image source: Netflix.

1. Asia remains a tough nut to crack

There's a lot of excitement with Netflix's prospects overseas, and understandably so. International streaming revenue soared 54%, lifting the more modest 25% domestic uptick. Netflix has proven to be a popular export -- accounting for 50.1% of its streaming subscriber base -- but it's been taking a more cautious approach through Asia.

China in particular with its restrictive ways and preference for homegrown platforms represents a huge opportunity for Netflix but also a challenge. Netflix doesn't have near-term plans to enter the world's most populous nation given the regulatory requirements, but it will be shifting more of its marketing and content muscle on India, South Korea, and Japan. 

"We have a lot more to learn," CEO Reed Hastings said during Monday afternoon's earnings call when it comes to Asia.

2. Netflix needs to get better at forecasting

Arguing that Netflix is weak when it comes to pushing out guidance after blowing estimates away may seem like being angry at a vending machine because it spit out two Kit Kat bars when you only paid for one -- but bear with me. Netflix used to be one of those tech companies that would routinely offer up lowball guidance, but that hasn't been the case these days. 

Netflix's subscriber guidance overshot reality in sizing up the second quarter of last year and this year's first quarter. Netflix has overestimated its appeal in two of the four previous quarters before Monday's big win. This may not seem problematic now, but just as it has followed up two misses with two blowouts, one also has to wonder if a blowout now will result in a miss next time out.

3. With heavy volume comes heavy misses

Netflix is perpetually ramping up its proprietary content. During the second quarter alone, Netflix rolled out 14 new seasons, 13 original comedy comedy specials, six original documentaries, nine feature films, and seven original shows for kids. If you didn't hear about most of them, you're not alone. For every 13 Reasons Why or Okja that becomes a viral hit, Netflix pays up for content that doesn't pay off.

Armed with more than 100 million subscribers, Netflix can afford to place more bets. No one else can spend the $6 billion on content that Netflix will this year, but instead of getting smarter with all of the data that it's collecting on viewing habits it seems that the opposite is happening. Netflix's batting average appears to be slipping. Sometimes it's striking out on shows that it's already given a second season, too, as we saw with the recent cancellations of The Get Down and Sense8, moves that made Netflix a rare villain with the audiences for those shows.

Netflix is a rock star these days, but it doesn't mean that it's hitting every note on key.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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