Here's the reason Netflix was downgraded, and the debate behind it
Ethan Miller/Getty Images
Ethan Miller/Getty Images
When Netflix expanded into over 130 additional countries on a single day this January, it seemed like the table was set for Netflix to take over the world. Netflix had jumped headfirst into original shows, from "House of Cards" to "Orange Is the New Black," most of which it could play for its customers worldwide. All that remained was for the rest of the world to fall in love with Netflix like the US had.
But months later, Wall Street is still split on how well Netflix will do internationally, and two recent analyst notes sum up the debate.
Earlier this month, analysts at RBC pointed out something they thought many investors were missing about Netflix: that its international ramp-up was, in profitability, coming along similarly to Netflix's rise in the US in 2012 and 2013. If Netflix's international markets are actually conforming to that pattern, it's great news for investors.
"We don't believe many Netflix investors realize this, and thus, we believe that the market underappreciates the profit potential behind Netflix's international rollout," the RBC analysts wrote.
Analysts at Macquarie, however, are not so sure.
In a note on Tuesday, they wrote that the near-term may not be easy because of high content costs, increased competition from Amazon in the US, as well as competition in many of Netflix's new countries. They downgraded Netflix's stock from "neutral" to "underperform."
The question mark around international expansion is a key piece of Macquarie's doubts. Netflix has run into stiff local competition, which often offers cheaper prices and more local content, according to Macquarie.
Netflix needs to shake something up.
"We believe success will require partnering with local content providers and/or investing in more local content, or in content that will travel," the analysts wrote. "This will be expensive - indeed, Netflix's total content obligations have ballooned to $16-18 billion including 'unknown' off-balance sheet commitments, and could well rise further."
The Macquarie analysts are also not sold on the assertion that all countries will eventually grow to love the product. There could be some countries that just aren't that crazy about Netflix.
But even though the analysts are skeptical of Netflix's success in the short term, they think there's "little doubt" Netflix will do well over time given its deep pockets and data.
The transition to streaming is still moving along, it just might be a bumpy ride for Netflix.
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