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Possible Downsides of Netflix, Inc. (NFLX)

5. Secular Decline in DVDs: Netflix earns a large portion of its total contribution profits from its DVD segment, but the number of consumers using physical DVDs is declining steadily. Netflix has been taking the profits from its DVD business and plowed it back into the domestic and International streaming businesses for long-term growth. However, the company is losing DVD subscribers at a solid pace.

Even though movie studios and content owners still rely upon DVDs for a portion of their revenues, the market for physical DVDs is expected to shrink further. As a result, a large part of Netflix, Inc. (NASDAQ:NFLX)’s contribution profits will be reduced dramatically.

6. Losses from International segment: The rise in Netflix’s stock price to a certain extent, is predicated on the company’s ability to succeed in the International markets. The company has gained solid momentum in adding subscribers, but has losses stemming from its International operations. Netflix did manage to reduce the losses arising from its overseas operations.

Netflix operates in more than 40 countries, and it takes a lot of capital expenses to build out these markets and add a lot of content to turn these regions into profitability. The company’s management pointed to roughly two years before Netflix can become a profitable player from its International operations.

Going Forward

Netflix, Inc. (NASDAQ:NFLX) has a few potential headwinds, but the company is growing its subscriber base rapidly. The company still has a large addressable market in the U.S. and in the International markets as well. The company is adding a lot of exclusive and original content to minimize its churn rate and grow its profits in the long-run.

The article Possible Downsides of Netflix originally appeared on Fool.com and is written by Ishfaque Faruk.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney (NYSE:DIS). The Motley Fool owns shares of Netflix and Walt Disney. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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

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