Time to End the Love Affair With Netflix, Inc. (NFLX)

Netflix, Inc. (NASDAQ:NFLX) is somewhat of a cult stock. Indeed, the company has not made a sizable profit for the last two years, but yet, the stock price keeps rising. However, there could be some gaps starting to show in the company’s strategy.

For a start

First off, the company’s margins. Netflix, Inc. (NASDAQ:NFLX)’s gross margins have risen from 61% in the first quarter of 2011 to a high of 74% during the last quarter of 2012. However, margins have now fallen back to 70% as the company struggles to drive revenue higher. On a net basis, margins have deteriorated even more, falling from 8.4% during the first quarter of 2011 to an average of 0.5% during 2012, but then ticking slightly higher to 1.5% this year.

In comparison, close peers Twenty-First Century Fox Inc (NASDAQ:FOX) and Time Warner Inc (NYSE:TWX) have seen their gross margins stabilize at 35% and 43% (in fact, Time Warner’s margin has increased slightly from 43% to 44% from 2011 to 2012) for the past two years, respectively. Additionally, Twenty-First Century Fox Inc (NASDAQ:FOX) and Time Warner Inc (NYSE:TWX) have kept net margins steady at approximately 10% for the same period.

Costs are rising

Secondly, Netflix, Inc. (NASDAQ:NFLX) has seen its cost of sales and interest costs rise significantly faster than revenue, stunting growth.

Figures in $U.S. millions except for indexation

On an indexed basis, revenue has grown 21% over the last five quarters, while cost of sales has grown 42% and interest costs have only expanded 2%. Still, the rapidly rising costs are a cause for concern, especially when it comes to profitability.