Netflix Inc (NFLX)

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Some of Netflix's Challenges Could Only Intensify in 2019
By: TheStreet | December 14, 2018

Netflix may have fallen far in the back half of 2018, but some of the core challenges facing the business could only intensify next year.

Will 2019 bring a fresh slate or more uncertainty for Netflix (NFLX - Get Report) investors?

This year, Netflix's stock is up 36% despite a precipitous tumble since July, when a subscriber miss provoked a negative turn on the stock that has persisted for months. But some of the core challenges facing Netflix have the potential to intensify in 2019, even though its shares are trading at a level that some consider cheap.

Netflix bulls argue that its dominance in streaming, strong renewal rates and ability to jack up prices in the future could reap rewards for investors. Lab42, a market research firm, noted in a recent report that Netflix's renewal rates are the highest of any streaming service, at 93%. "Netflix's competitors have an uphill battle to take market share from the current industry leader," concluded Jonathan Pirc, Lab42's founder. In addition to the prospect of price increases, Netflix's also tinkering with more diversified pricing in some markets, including mobile-only plans in Malaysia and 'Ultra' subscriptions that allow HD streaming on up to four devices at once.

New subscriber growth is still an obsessed-over data point for Netflix investors, however -- and it could remain vexing as Netflix continues its aggressive charge into international markets. Subscriber growth is a hard-to-forecast metric because of the number of relatively new Netflix markets and its partial reliance on the viral success of its shows, as Moody's Neil Begley explained to TheStreet in an interview: "In many of these countries they launched only a year and a half ago, and a lot of the success is in how aggressively they market, and word-of-mouth," he said.

That's reflected in an analysis published by S&P Global Market Intelligence this week, which found that demand for Netflix original series will outpace demand for licensed content by October 2019, even as the overall competitive landscape in video streaming grows even more crowded with the expected debut of Disney's (DIS - Get Report) 'Disneyflix' in 2019, along with other likely players such as Apple (AAPL - Get Report)

"The future for the industry is likely to be even more crowded and the winners are still unknown," said Deana Myers a research director at S&P Global Market Intelligence.

That could put further pressure on costs even for licensed content, as evidenced recently by the $100 million that Netflix reportedly paid to renew its licensing of 'Friends' through the end of 2019 -- up from the $30 million it had paid previously.

Content doesn't come cheap in any case, and that's another potential risk factor that could keep Netflix investors up at night in 2019. As pointed out by Pivotal in a recent research note, Netflix has north of $19 billion in spending commitments on content and is losing money -- and it has to demonstrate it can keep growing subscribers at a rate that's commensurate with the spending.

"If their subscriber growth ever went materially negative (without a price increase) their results could be overwhelmed by their significant fixed costs," wrote Pivotal's Jeffrey Wlodarczak.

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