Opportunities
International Markets: Netflix’s biggest opportunities lie in the international segments. Netflix invested heavily across Europe especially in the Nordic region, which should aid in increasing its subscriber base. Also, Netflix is increasingly tapping into the Latin America region as the addressable market in the region is huge, and the company is working with regional banks to improve payment collections. The 6.1 million subscribers in the International segment should gain traction, as more consumers adopt Internet TV.
Original Content:
The production of content available on only Netflix represents a big opportunity for the company as original content delights Netflix’s current customers, and brings in newer ones. Producing original content aids in enhancing Netflix’s brand value and creates significant publicity and word-of-mouth marketing. This trend can be seen in its marketing expenses, which have gone down substantially in the last 4 quarters and in Q4 2012 stood at 12.4% of sales. As a result, Netflix can substitute some of its marketing budget to produce more original shows. Netflix will be releasing a few original shows in 2013.
Secular Forces:
The increased adoption of Internet connected devices by consumers for media consumption aids substantially in adding more subscribers. Accessing Netflix is increasingly becoming easier as Netflix buttons are being placed on Smart TVs. Increased tablet sales and internet penetration in many regions across the world will provide additional tailwinds for adding subscribers.
Threats
Content Prices: Netflix is facing inflated content prices as it will be looking to sign more exclusive content deals. Increased competition among streaming companies will also lead to higher prices, as they outbid each other. Netflix’s debt load is also increasing due to this content price inflation. And also, the front-loaded cash payments stemming from the production of original content are also pushing Netflix to take out more debt as well.
Competitive Environment:
Competition in the Internet streaming space is intensifying with the entry of Coinstar, Inc. (NASDAQ:CSTR)’s Redbox Instant which not only has the same price point as Netflix, but also offers 4 DVDs that are redeemable at various Redbox Kiosks across the country. In addition, the existing competitors including HBO Go, Amazon.com, Inc. (NASDAQ:AMZN) and Hulu all have decent offerings and good subscriber bases as well. However, Netflix’s streaming product offering is still the market leader by a big margin.
The bottom line
Netflix is the dominant player in the video streaming space, and will likely be able to overcome near-term headwinds. Smaller losses from the International segment in the next few quarters, along with some good original content releases might serve as catalysts. However, the current valuation seems to have factored in the near-optimism for the stock.
The article Netflix: A SWOT Analysis originally appeared on Fool.com and is written by Ishfaque Faruk.
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