Netflix (NFLX +0.94%) has been one of the best-performing stocks in the market these past few months. Shares are up more than 60% since September, and now sit 30% higher for all of 2012.
But the online video streamer faces major challenges in keeping that momentum going. For one, Redbox Instant, the new streaming service by Coinstar's (CSTR +0.00%) Redbox and Verizon (VZ 2.10%), just started rolling out last week. It's too early yet to know if that new competitor will mount a serious challenge for Netflix's members. But here are three of the key hurdles that we know the company needs to face in the coming year.
Get paid in Latin America
Latin America represents a huge prize for Netflix. By the company's count, there are over 50 million broadband-connected homes across the region. That's four times more than in Netflix's first international market, Canada. It's clear, then, why Netflix made such a quick move into the area. The company dove headfirst into 43 countries and territories through Latin America and the Caribbean all at once, in September 2011.
Management had hoped to get to breakeven there in about two years, or just a bit longer than it took in Canada. That market sprung to profitability ahead of schedule, and is kicking in more contribution margin with each passing quarter.
But things haven't worked out that way in Latin America. While key metrics like per-viewer hours are trending up, Netflix is having a terrible time collecting payments. As the company put it, "many Latin American broadband households are leery of [providing], or unable to, provide debit/credit cards that can be accepted over the Internet." Until Reed Hastings and Co. can solve that payment problem, Latin America won't reverse its drag on profits.
Get back to global profitability
And speaking of profits, Netflix needs to get back in the black on a global basis next year. The company's U.S. operation is strong; there's no doubt about that. Profits are rising on the streaming side, and the legacy DVD business continues to throw off plenty of cash.
But all of that income has been spoken for by Netflix's overseas trips. And the company expects to close out the year with an operating loss for the fourth quarter, thanks to expenses from the latest international launch into the Nordics. In order to keep funding its expansion, Netflix needs consolidated revenue to catch back up to expenses.
Increasing content commitments won't make that goal any easier. Even though the bulk of Netflix's new giant deal with Disney (DIS 0.45%) won't come online for years, costs for the deal will start trickling in now, as many of the House of Mouse's catalog titles have already been made available to stream. In total, Netflix is spending about $2 billion a year in streaming commitments. Amazon.com (AMZN 1.77%) isn't far behind with its own content plans, spending close to $1 billion itself. So the content arms race doesn't look like it will be slowing down anytime soon.
Get better at forecasting subscribers
Paying more for content isn't a problem as long as Netflix's membership continues to grow at a predictable pace. There was plenty of good news in Netflix's third-quarter report, including unexpected profitability for the quarter and all-time highs in member viewer-hours.
But subscriber growth was the real disappointment. The company admitted it would end up well short of the 7 million net domestic subscriber goal that it had projected just two quarters back. Instead, Netflix should ring in the new year with only about 5.3 million more members than last year. That's solid growth, but it's hard to have much faith in the company's projections until it can get a handle on the most important one, membership additions.
What's next?
Netflix can start rebuilding that faith with its fourth-quarter report. It now expects to end the year with about 27 million domestic streaming members, and an extra 5.5 million subscribers coming from international markets. Netflix needs to at least meet those targets to start repairing investors' confidence in the company's forecasts. But if the quarter brings a big miss in subscriber growth instead, next year could be a rough one for Netflix shareholders.
