What Netflix, Inc. (NFLX) Investors Need To Ask

Netflix’s free spending, and an under appreciated threat
The fourth question Netflix investors need an answer for is, what happened to management’s original expansion plans? The original plan was to allow U. S. streaming and DVD profits to fund international expansion. However, the company’s aggressive expansion spending is apparently outstripping this profitability. In just the last few years, Netflix has raised its long-term debt level from about $200 million to $700 million today.

Last but not least, and under-appreciated threat to Netflix, Inc. (NASDAQ:NFLX)’s dominance in the streaming market is the ability of content owners to create their own apps and avoid using Netflix completely. Most of the major television stations such as NBC, CBS, and ABC, all offer their own apps for popular mobile operating systems. This begs the question, with millions of iOS and Android users, has Netflix’s first mover advantage been negated?

As you can see, there are many questions facing Netflix and none of them have an easy answer. With the stock selling for over 175 times projected earnings and analysts calling for earnings growth of roughly 19.5%, the biggest question facing the stock might be why are investors willing to pay so much? Considering that Amazon sells for a projected P/E ratio of 27% more, yet is expected to grow earnings by a 90% faster pace, one could easily argue that Amazon is a better value.

Investors who are unwilling to pay triple digit P/E ratios might consider Verizon Communications Inc. (NYSE:VZ). The company offers a solid dividend yield of just over 4%, and it appears that Verizon is willing to spend money to try and compete in the streaming video game. Netflix has nowhere near the financial capabilities of its competition, the company is taking on debt to expand, and at some point subscriber growth will slow down. Investors who expect huge growth from Netflix, Inc. (NASDAQ:NFLX) are likely to be disappointed, and this may occur sooner than they think.

The article 5 Questions That Netflix Investors Need To Ask originally appeared on Fool.com and is written by Chad Henage.

Chad Henage owns shares of Verizon Communications (NYSE:VZ). The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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