Categories Analysis, Technology

Netflix is heading into what could be a very difficult year

So far, it had been a dream run for Netflix (NFLX). The company has benefited immensely for recognizing the potential of the streaming technology in its nascent stages. It has established itself as the leader in the streaming space and has gained respect for the quality of content it produces.

It has also rewarded its investors well, with the stock rallying more than 350% in the past five years. In what could be termed as its best rally, the stock had gained almost 40% in the first half of the year, before paring much of these gains in the latter half.

Netflix India how it works

Still the stock is up 32% in the trailing 52-weeks period, so investors can’t complain. The rising debt load has so far not been able to dent investor confidence in the company, thanks to its loyal customer base and high retention rates.

However, Netflix could be hitting a hard patch next year, primarily due to external factors.

The biggest challenge facing Netflix is the launch of Disney’s (DIS) streaming service in 2019. With an amazing collection of content and popular characters, as well as slew of much-loved platforms such as Marvel, Pixar and National Geographic and Lucasfilm, Disney+ is already a formidable competitor to Netflix.

Disney CEO Bob Iger had earlier said that its own service would be priced below Netflix. Also, Netflix had recently axed a couple of popular Marvel shows from its platforms. Both these factors are likely hamper Netflix’s retention rates next year.

Now let’s move on to international markets. Netflix has been aggressively penetrating into international markets by creating content in regional languages. But all this is quickly burning up the company’s cash coffers, further burdening its liquidity.

Netflix is hoping to make up for the content production and licensing expenses through its subscriptions, which are already considerably higher than regional rivals. For example, in India, Netflix’s subscription package is priced almost double than that of regional competitor and market leader Hotstar.

Netflix now leads download traffic, beats torrents and PlayStation downloads

Hence offering a discount in the emerging markets would prove too costly for the company.

Separately, Netflix’s habit of piling up long-term debts is set to have its consequences, with interest rates gradually rising going into 2019.

To clarify, none of these speculations suggest that Netflix would succumb in 2019 and that its time to sell the stock. The stock continues to be a bull at the end of 2018 and has the potential to continue its run, though the track is getting a bit murky.


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