Netflix, Inc. (NFLX) Warning: 3 Red Flags in The First Quarter Report

Foolish bottom line

Perhaps the biggest problem facing Netflix, Inc. (NASDAQ:NFLX) is how to fund rising content costs and expansion. CEO Reed Hastings has three options:

1) Ax programming: Already we’ve seen Netflix cut content from Disney, Sony, A&E, and History Channel. The problem with this strategy is that members may cancel their subscriptions and move to competitors that offer more content.

2) Issue debt: In January, Netflix issued $500 million of debt at 5.4%. The problem is the company’s finances are already stretched. Standard & Poor’s already rates the company’s debt as junk and could lower that rating if the Netflix’s balance sheet continues to deteriorate.

3) Raise prices: Netflix has already proven this isn’t an option. The last time the company raised prices, customers revolted.

Of course these problems don’t just plague Netflix but also competitors entering into the business like, Inc. (NASDAQ:AMZN), and Coinstar, Inc. (NASDAQ:CSTR). Few entry barriers, rising content costs, and low prices are glaring hole in the business model. While most of the focus will remain on the online providers, the real winners in the streaming wars may well be CBS, Disney, and Time Warner Inc. (NYSE:TWX).

The article Warning: 3 Red Flags in Netflix’s Q1 Report originally appeared on

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.