Netflix’s Recent Uptick Luring Investors but is it a Sound Investment?

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In these tough economic times, everybody is looking for a good way to make some more money. Some people are taking second jobs to pay their bills, while others are dipping into their vanishing savings accounts.

But after everyone fled the stock market in 2007, some people are starting to come back out of the woodwork and invest their hard earned money in the stock market. While this can work out very well for some people, it does not always turn out that way for everyone.  Investors need to be wary of “hot stocks” and trendy companies. One company that investors should watch cautiously is Netflix.

Netflix was a huge hit when it hit the market. People could get DVDs in the mail, return them easily, and pay one low monthly fee. It was easier, cheaper, and had a better selection than your local DVD Rental store and pretty soon those small stores went out of business.

Eventually Blockbuster, fighting for its life against Netflix, started offering a similar product to Netflix’s. Still though those ubiquitous red Netflix envelopes were synonymous with DVDs by mail. When Netflix start streaming movies on its website, it seemed like the company was headed for gold.

But Netflix has not been without its own problems. When it relied on DVDs – and it still does a bulk of its business through the DVD by mail system – many customers complained that the DVDs would arrive scratched. People couldn’t rely on the company to deliver. Then it started making changes in its pricing plans and – even worse – not communicating them well. Somehow this great company was tripping over its own feet.

The company has said, though, that it has a long-term vision of relying only streaming videos. This is a great step in a technologically advanced direction, and will also cut its costs on shipping and tracking of the DVDs. This can ease investors minds who don’t want to put their money in old technology.

Right now there are about 85 million American households with the broadband capabilities necessary for streaming movies. About 25% of those households use Netflix. Other competitors include Amazon Prime and Blockbuster (as mentioned above). So Netflix has a commanding market share, and room to grow. And very importantly, Netflix has the best online streaming library out of all three of these services. This is good news for investors.

However, as with any stock, Netflix also faces challenges. One of the biggest risks to its success is that its international expansion will slow because the service will simply not catch on. In Britain, for example, there is already local competition, and in Latin America, people simply have less disposable income and so may not be able to afford it.

Many people don’t even have credit cards, which makes using the service impossible. Another big risk is posed by the competition: Netflix is in the lead right now, but that can change quickly. Amazon, Blockbuster and Dish are spending a lot of resources on upping their game in the streaming arena, so Netflix needs to work to stay ahead. A content bidding war could result from the competition, making videos more expensive for Netflix to offer and shrinking their profit margins.

So is Netflix a good investment? It might be, but investors should be wary. 

About the author: Carl Petoskey is seasoned vet when it comes to investment information. When he’s not writing poignant articles, you can find him reviewing Comcast Business Offers or covering other business related services.