Netflix’s International Expansion Is Proving To Be Very Costly

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With Netflix, Inc. (NASDAQ:NFLX) readying to announce its third quarter earnings after the bell on Tuesday, analysts have already been asking questions on whether the company’s international expansion is being done too quickly.

In just over a year, Netflix, Inc. (NASDAQ:NFLX) has launched its video service in 49 countries; last week, it started offering TV shows and on-demand movies in Scandinavia, reported Reuters. The company faces competition there with the cable network HBO, which is beginning to sell online subscriptions for its programs.

Netflix's International Expansion Is Proving To Be Very Costly

Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings recently said that early subscriptions in Nordic countries have exceeded expectations, according to Reuters. The company plans to concentrate on that area “for the next few quarters”, but it hasn’t secured plans to go into other countries.

Why this region? Hastings said via Reuters, “Nordics is becoming the global battleground for inventing the Internet television.”

This global expansion is an expensive one and to help finance additional units abroad, Netflix needs to keep adding new subscribers to its $8-a-month streaming service in the United States, analysts have said.

For the third quarter, Netflix is expected to announce a 5 cents per share profit, according to Reuters, but back in July Hastings said the company will fall into the red for 2012’s final three months, thanks to its international spending; this could represent its second quarterly loss of the year.

Analysts are worried.

Steve Frankel, a Dougherty & Co analyst, said via Reuters, “My big concern is they are in a phase of profitless prosperity, that all the money they make domestically is going to be aggressively reinvested in international expansion.”

He has a “Neutral” rating on the stock.

On October 9, Moody’s Investors Service placed Netflix’s debt under review for a possible downgrade, noting its move to international markets and its “increased vulnerability” to the U.S. streaming business competition that encompasses its greatest number of subscribers.

Hastings isn’t immune to the concerns and on the same day as the Moody’s news, he gave up his Microsoft Corporation (NASDAQ:MSFT) board seat to remain focused on Netflix’s issues.

But another analyst has concerns for the company. Michael Corty, a Morningstar analyst, said to Reuters, “The domestic business is competitive enough. They need to put as much resources and capital into the domestic business as they can.”

He added that Netflix, Inc. (NASDAQ:NFLX) was “overextending” by moving into the numerous foreign markets. Corty has a “Sell” rating on Netflix, but recently Citigroup gave it a “Buy.”

Year-to-date, Netflix’s stock is down 4.19 percent, but it has fallen 44 percent from the previous year, when the company gave a heads-up that international expansion would bring short-term financial losses.

Hastings has argued these losses are worth it to grab a “once-in-a-generation” opportunity for early entry into new markets, reported Reuters. He explained that every time the company incurs a loss, Netflix will go back to seeing a profit prior to entering the next new region.

On Tuesday, one number investors will keep their eyes on is the whether or not Netflix, Inc. (NASDAQ:NFLX) will meet its 7 million target for new U.S. streaming customers in 2012. Back in July, Hastings gave a heads-up this may be a challenge to achieve.

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