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Technology Stocks : Game Changers and Market Movers
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From: Paul H. Christiansen11/21/2014 3:49:12 PM
   of 686
 
Netflix’s Profit Puzzle

When it comes to online streaming businesses, Netflix has become the gold standard. But what is often overlooked is that Netflix has yet to show that its streaming service will generate gold in the form of robust profits.

That’s an issue not only for shareholders who now value Netflix at $23 billion—in the range of mid-sized traditional TV companies—but for anyone contemplating investing in any subscription streaming businesses that offers traditional entertainment content like video or music.

Simply put, while Netflix has signed up 50 million global subscribers with a low-priced ($8 to $9 a month in the U.S.) subscription offering lots of TV shows and movies, the high costs of licensing that content combined with a limited ability to raise prices is likely to ensure that the kind of profits common to traditional cable channels won’t materialize for the streaming service.

Right now, as it expands, Netflix is in growth mode and generating mediocre profits on paper but no actual cash. Long term, though, even assuming it adds 30 to 40 million more subscribers, Wall Street estimates suggest the company won’t enjoy the rich margins now enjoyed by the pay-TV service arguably the closest in strategy: Time Warner’s HBO, which for the first three quarters of 2014 made four times the operating income as Netflix on roughly the same revenue.

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Netflix’s Profit Puzzle
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