Netflix, Inc. (NASDAQ:NFLX) shares were rising fast on today’s market, as a wave of optimism surrounded the company ahead of its first quarter earnings announcement after the market closes this afternoon. Investors may not be appreciating the effect that international losses will have on the company’s bottom line.
International losses have gone hand in hand with earnings reports from Netflix, Inc. (NASDAQ:NFLX) for multiple quarters in a row. Investors haven’t seemed to mind the effects of those losses however, concentrating more on the company’s growing market in the United States. The spectacular rise in the firm’s valuation has made some contrarians looking for weaknesses in the company’s businesses.
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The obvious answer is the firm’s international investment. Because of international copyright law, Netflix, Inc. (NASDAQ:NFLX) has to make separate deals in order to offer content to international markets. Europe’s fractured legal system makes this situation even more expensive and left the company with substantial losses in its international business.
In the fourth quarter of 2012, Netflix Inc. (NASDAQ:NFLX) lost more than $100 million on its international investment. In contrast, the company only managed to make $843 million on its domestic business. Costs in the international market are expected to decline in 2013, to around $40 million in the fourth quarter of 2013, but there are substantial variables involved.
Netflix, Inc. (NASDAQ:NFLX) does not have the same moat in international markets, like the highly sought after United Kingdom, as it does in the United States. Competition, from companies like Amazon.com, Inc. (NASDAQ:AMZN), in the international streaming market is increasing.
The question is whether or not investors really care about Netflix, Inc. (NASDAQ:NFLX)’s international business. With a 2012 P/E of close to 600, investors expect substantial growth in earnings. It doesn’t look like that growth is going to come from the international market any time soon, and the domestic market can only grow a certain amount before it’s saturated.
Netflix investors need to watch this trend closely, rather than moving on the company’s momentum and perceived stickiness related to the firm’s original content. International losses are expected to continue for at least twelve months.
On today’s market Netflix, Inc. (NASDAQ:NFLX) stock rose by around 5 percent. At time of writing, the firm’s shares stood at $171.25. So far in 2013, the media streaming firm’s investors have seen their shares rise by more than 80 percent, gaining momentum on a better than expected January earnings report and traction with the company’s original content.