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Factors Influencing Prospective Growth of Netflix

January 01, 2013
Muhammad Bazil

Muhammad Bazil

3 followers
Netflix Inc. (NFLX) is one of those stocks that have reached a commendable peak and spiraled downwards in a very short period of time. Netflix reached its peak in 2011 when its stock value almost reached an impressive $300. However, it has been downhill for Netflix from that point. There have been numerous factors that have played against Netflix in the recent past. Some of those factors are: increasing competition in the market, cost of operations, and loss of subscribers. Netflix lost a large number of subscribers after it changed its pricing policy and increased its subscription fee. This step caused a major outrage among subscribers and caused significant loss to the company. It was reported that Netflix lost around 1 million subscribers in the quarter in which it redesigned its pricing strategy. All these factors collectively caused a steep decline in the company’s stock price. Currently the stock of the company is being traded within the range of $88.90 and $90.55 per share. The following chart represents the rise and fall of the stock value of Netflix over the past five years:

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The high volatility of the company’s stock in the recent past can be evidenced from its 52-week range which is $52.81 and $133.43. At this stage, it can be said that Netflix is a risky investment; however, further analysis of the relevant factors may add some optimism regarding the prospective financial and market performance of the company. The main revenue of the company is generated from its online streaming services. For a monthly fee, subscribers can watch movies and television programs online on a wide array of devices.

Netflix and Competition

One of the biggest concerns for Netflix with regard to its prospective growth is the rising competition in the market. Netflix faces direct competition from Amazon.com (AMZN) and Amazon is actively trying to gain a stable market position. The interest of Amazon in proceeding in this direction can be evidenced by the fact that Amazon is constantly increasing the number of titles available for online streaming. Amazon.com currently offers an interesting range of movies and TV shows to its subscribers and it charges an annual fee of $79. Recently Amazon added 25,000 new titles in its video library and this addition had a very positive impact on its share price. Anthony Bay, vice president of video at Amazon said, “It would be fair to assume that we're going to continue to add to Prime Instant Video.” He further added, “The more great things to watch, the more people will tune in.”

This expansion by Amazon has created a highly unfavorable environment for Netflix which is already struggling with its market share. Netflix is currently recovering from last year’s downslide of share price and the increasing competitive pressure will make the company’s struggle more difficult.

Netflix is also facing increasing competition from Showtime and HBO. However, Netflix seeks to strengthen its position by introducing exclusive content for the streaming service. The exclusive programs will attract loyal subscribers. Netflix also entered into a deal with The Walt Disney Company and this is being viewed as a positive step for the company.

Netflix to Integrate Social Sharing

Another positive aspect that has the potential to set Netflix on the right path is social media sharing. The company has been unable to introduce the social sharing feature due to the Video Privacy Protection Act, which does not allow the disclosure of video rental information, however the recent amendment to the law will allow the company to introduce the ‘social media integration’ feature on the website. Social media has played a vital role in the success of numerous businesses, and with the introduction of the social sharing feature, Netflix will be able to reach out to a number of potential subscribers.

After the analysis of the market performance of the company, its competitive environment, and its prospective plans, in my opinion, investors should hold the stocks in the company. The attempts by Netflix to expand its video library and the integration of social media will bring new subscribers to the company, pushing the revenue to a higher level. However, buying the stock cannot be recommended as the stock has shown a highly volatile behavior in the past.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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