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Netflix Might Not Stream Profits for Much Longer

Netflix (NASDAQ:NFLX) suffered growing pains in 2011 and 2012 thanks to its botched Qwikster efforts and fears that momentum was waning as competitors got into the space.

But while the stock remains significantly off its all-time high of around $300 in mid-2011, it is up more than 100% in just a few months thanks to optimism over its international growth plans, new content deals and hopes for original content. Most recently, Netflix shot up 6% on Tuesday thanks to an upgrade from Pacific Crest.

It’s been a wild ride, to say the least. But the million-dollar question is whether Netflix can keep up its recent run or whether the movie is about to end.

My two cents: Don’t wait for the credits — grab your coat and head for the exits to beat the rush.

Netflix Numbers aren’t Great

I’ll get to my personal experience with the service and outlook for Netflix in a moment. But first, let’s talk hard numbers.

Most importantly, Netflix is bleeding cash on aggressive international expansion that has yet to pay off. International streaming operations posted losses of almost $100 million a quarter in 2012. Yes, Netflix is adding about 500,000 overseas users or so each period with that expense … but you have to wonder when (or if) it will reach the scale to move into the black.

There’s also the cash burn on content acquisition, the gamble of hundreds of millions on original programming like House of Cards and a recent effort to beef up its children’s programming with a Dreamworks Animation (NASDAQ:DWA) project.

Look, I know you have to be aggressive and spend money to grow. But over the last several months, I haven’t seen any material different in Netflix fundamentals. Revenue was up 12% in FY2012 over the previous year, but profits evaporated. Earnings will improve substantially in FY2013 but will remain half of 2009 numbers despite what could be nearly three times the revenue.

Fiscal 2014 forecasts look much brighter, with EPS projections of around $2.38 according to Standard & Poors. But based on that figure you have a forward price-to-earnings ratio of 84 … which seems to imply growth has long been priced in.

There also are about 8.5 million shares held short for about 15% of the float in Netflix stock. And despite the rallying stock price that has scared enough people to force a short squeeze, short interest continues to rise.

What Growth?

It’s not that I don’t like Netflix. I am one of those “cord cutters” you hear so much about, who doesn’t pay a dime for cable TV and instead relies on streaming video via NFLX and Hulu. Well, to be honest, my wife watches Hulu and my kids watch Busytown Mysteries and Timmy Time. I never get to choose.

Anyway, I adore what Netflix does for my family by providing a host of content for a mere $7.99 per month. Recent content deals like the one with Disney (NYSE:DIS) and original programming like the Kevin Spacey drama House of Cards have made the service even more important to my household.

But here’s the thing: I don’t see where the growth comes from beyond people like me that already subscribe.

For starters, there are a ton of options. Heavyweights include Amazon (NASDAQ:AMZN) with its Prime streaming video offerings, as well as Hulu. In fact, right now my wife regularly uses the free version of Hulu, a joint venture between Disney’s ABC, News Corp (NASDAQ:NWSA) network Fox and Comcast (NASDAQ:CMCSA) subsidiary NBCUniversal.

If Netflix ever tries to juice profits by raising our rates significantly, moving over to Hulu Plus would be no problem for me or many others.

There are also increasing efforts from old school cable companies like Time Warner (NYSE:TWX) and Comcast to get more into streaming and free on-demand content. Consider the recent Time Warner deal with Roku to allow its subscribers tap into a huge array of streaming video options.

In short, there may be upside for the streaming video market but it remains to be seen if that growth is with Netflix.

Then again, what do I know? I haven’t understood this recent run for the stock and I could continue to be wrong for another 100% gain … but just remember 2011 and how fast NFLX changed the last time things soured.

You don’t want to be caught in the audience at that sequel.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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