Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Netflix, Inc. (NFLX)’s Notable Headwinds: Coinstar, Inc. (CSTR), Time Warner Inc (TWX)

After its year-end earnings, the stock price of Internet TV pioneer, Netflix, Inc. (NASDAQ:NFLX) surged more than 80%. There might be a lot of upside left, but at a sky high valuation of more than 625 times earnings, the stock should be reassessed. Netflix, Inc. (NASDAQ:NFLX) has a slate of original shows that will be unveiled throughout 2013, and some of them might perform very well. But the dark sides of an investment in Netflix should be evaluated before jumping on the bandwagon.

1. Faster than expected decline in the DVD business: Netflix has tactfully utilized the contribution profits from its DVD business in the U.S. to fund the losses stemming from its international operations. Due to the heavy investments in the build-out of its international segments, Netflix’s contribution profits in 2012 were the lowest in the last 3 years.

As Netflix, Inc. (NASDAQ:NFLX) generates a majority of its total contribution profits from the DVD segment, an accelerated decline due to secular consumer media consumption patterns can negatively impact the company’s bottom line. Also price increases by the post-office which kicked off in January will further eat away at the contribution profits.

2. Price competition: The probability of a heated price war among existing market players in the Internet video streaming space is unlikely due to the current low prices. However, a small probability of such an event exists.

Netflix’s main rival in global streaming,, Inc. (NASDAQ:AMZN) is reputed for slashing prices rapidly to gain control and incremental market share. It won’t be surprising to see Amazon strip away its video-streaming arm from its Prime Shipping Service, and adopt a price point similar to Netflix, Inc. (NASDAQ:NFLX) to gain a bigger piece of the pie. Amazon’s ability to fund large amounts of content and an installed user-base for its e-Commerce platform makes it a very strong competitor.

3. Content pricing: Netflix licenses substantial amounts of content from movie studios and other companies. The studios are motivated to ask for increased content prices or not renew current contracts, as these studios have other outlets to sell their catalog content. Content price inflation and non-renewal of contracts will impact Netflix in a negative manner.

In addition, the fixed price and long-term nature of these contracts also creates significant amounts of content obligations. Even if the subscriber additions do not live up to expectations, Netflix, Inc. (NASDAQ:NFLX) will have to keep on paying these fixed costs. The company recently took out additional debt to fund its business. In addition, competing services like Amazon are also getting involved in bidding for exclusive and premium content which might push prices higher.

4. Newer and differentiated Services: Coinstar, Inc. (NASDAQ:CSTR) and Verizon Communications Inc. (NYSE:VZ)‘s joint venture of Redbox Instant caters to mostly movies and has a much smaller content library of roughly 4600 titles, but compensates for that short-fall with 4 DVDs redeemable at the thousands of Redbox kiosks scattered across the country. If Redbox ramps up its offerings of TV shows in its service, along with a much a bigger content catalog, it will pose a bigger threat for Netflix’s streaming business. Coinstar, Inc. (NASDAQ:CSTR)’s existing offering of self-service DVD rentals already competes with Netflix’s DVD business.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.