Four Major Risks for Netflix, Inc. (NFLX), According To William Power and Steven Beckert

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In the last few years, Netflix, Inc. (NASDAQ:NFLX) has enjoyed a phenomenal success in attracting subscribers in the United States, as well as, the rest of the world. However, there are also some skeptics who believe that the days of rapid growth will come to an end sooner or later.  According to Baird analysts, Steven Beckert and William Power, there are, at least, four big risks that need to be watched by investors before taking a call.

Downgraded To Neutral Rating

The two analysts have downgraded the shares of Netflix, Inc. (NASDAQ:NFLX) to a Neutral rating from Buy citing that subscribers numbers might have plateau. They have also cited a survey in the United States wherein 46% of the respondents were the subscribers of the streaming video service in the fourth quarter. Though it witnessed a YOY growth, sequentially it indicated a percentage point drop from 47% in the third quarter. It seems that the fourth quarter was a flat one as far as subscribers’ growth in the United States was concerned.

Therefore, the company needs to look at the International division for subscribers’ growth. However, the streaming video firm is having execution issue since global markets have weak broadband penetration rates apart from weak credit usage, as well as, TV. These factors will likely hurt the company’s prospects in international markets. Also, the second risk involved the possibility of increased churn as price hikes was rolled out. Netflix, Inc. (NASDAQ:NFLX) is said to be closing in the gap for subscribers in the United States with HBO. While it is enjoying 40.3 million subscribers, HBO is the leader with about 41 million subscribers. Analysts have suspected that the company could out-grow the leader due to lower monthly price point. However, the ceiling might be lower than the estimated level.

Competition And Increasing Content Costs

The company is also facing increasing competition with new entrants, as well as, the established ones like Amazon.com, Inc. (NASDAQ:AMZN) or Hulu. Traditional cable, as well as, satellite video providers are also trying to enter the streaming video segment. That apart, emerging initiatives such as Aereo and TV Everywhere were also giving sufficient headaches to Netflix.

The fourth risk is related to the increasing content cots. Netflix, Inc. (NASDAQ:NFLX) is pushing towards more original content and programs. That would increase the costs of content and would put pressure on the profitability, as well as, a cash flow that would be more than the predicted level. The Two analysts said that original programming cash costs were treated as front-ended loaded. Given the four risks, there appears to be not much room for growth. The analysts have also slashed their price objective to $115 from $128.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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