Netflix, Inc. (NFLX): Time To Sell?

Netflix, Inc. (NASDAQ:NFLX)Increasing online video consumption has once again proven to be a tailwind for Netflix, Inc. (NASDAQ:NFLX). In its first quarter results, Netflix, Inc. (NASDAQ:NFLX) posted revenue of $1.024 billion, beating the consensus estimate of $1.016 billion. This quarter showed strong online subscriber growth in both the US and international markets. In the US, the company reported net subscriber growth of 2.03 million against the consensus estimate of 1.75 million, and in the international market it experienced growth of 1.02 million, marginally beating the consensus estimate of 1 million.

However, its DVD offerings continue to experience subscriber loss, although the loss came in under expectations. In the first quarter, its DVD subscriber loss was 0.241 million compared to the 0.394 million estimate.

Netflix, Inc. (NASDAQ:NFLX) is betting big on its original content strategy. This strategy is the main reason behind the gains in subscribers in the US. Under this, the company is focusing on bringing out its own content which is not available on any other platform. Its TV series — like House of Cards, Lilyhammer and Arrested Development — are paying off. House of Cards was a significant driver for good performance in the first quarter. Furthermore, the subscribers who signed up to watch House of Cards remained with the company even after the series ended.

However, there are also concerns about the rights of the original content. Netflix, Inc. (NASDAQ:NFLX) doesn’t own rights to these series. It had contracts with the series’ production houses and will pay part of the cost in return for exclusive rights to stream video on demand. This means that these series will be available on other platforms too. For example, its highly popular series House of Cards’ DVD will be released in June. It is also expected that a commercial television broadcast of this series will begin once Netflix, Inc. (NASDAQ:NFLX)’s exclusive license expires.

In the fourth quarter earnings call, Netflix compared its original content with Time Warner Inc (NYSE:TWX)’s HBO. If we compare HBO with Netflix, Netflix is clearly lagging in terms of original content. HBO currently has around 15 new original series in production, and 63 older comedy and drama series. Out of these 63 series, there are a few very famous ones like The Sopranos, Sex and the City, The Wire, and Da Ali G Show. Netflix’s frequent comparison of itself with HBO has created a consumer perception that Netflix, Inc. (NASDAQ:NFLX) owns the content, which is not true. HBO regularly recycles its programs and controls the streaming rights of the content, which helps its margins.

On the other hand, Netflix is facing increasing competition from Amazon.com, Inc. (NASDAQ:AMZN)which is investing around $1 billion every year to gain market share. Amazon entered into original content with its EPIX and Downtown Abbey deal. In the first quarter, Amazon.com, Inc. (NASDAQ:AMZN) entered into an exclusive subscription service deal with PBS Distribution to distribute the third and fourth seasons of Downtown Abbey. Amazon.com, Inc. (NASDAQ:AMZN) is likely to spend $1 billion per year on content — almost half of Netflix’s total spending. Once Netflix’s current exclusive deals near expiration, Amazon could match the offer from Netflix.

Bottom line

Netflix will continue to increase its subscriber base in both the US and international markets, with its focus on original content. However, Amazon’s aggressive move into this market will increase content costs for Netflix, Inc. (NASDAQ:NFLX), which has been the major concern for investors. Netflix already has content obligations of $5.6 billion over the next five years, out of which $2.3 billion is to be paid in less than one year.

Its stock surged almost 25% after the announcement of first quarter results. However, considering its slowing DVD business, which is a high margin business, as well as increasing competition in the US and expected increases in content cost, I recommend holding this stock at the current level and not taking a new position.

The article Should You Sell this High-Growth Stock? originally appeared on Fool.com and is written by Madhu Dube.

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