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Netflix's House of Cards

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Netflix is serious about adding more original content in 2014, with the company noting during the third-quarter it expects to "double our investment in original content (though still representing less than 10%  of our overall global content expense)," according to Netflix's shareholder letter. Aside from House of Cards, there will be the second seasons of Orange is the New Black, Derek and Hemlock Grove and the recently announced project from Todd and Glenn Kessler and Daniel Zelman, the creators of Damages. Netflix is also teaming up with Dreamworks Animation (DWA) to unveil a new animated series.

With the addition of more original content, Netflix's spending is likely to go up, not including the near $6 billion in off balance sheet liabilities the company has. Content deals are getting increasingly more expensive for Netflix, and the company's free cash flow is going more toward spending, hurting the company's future profitability, Pachter wrote in his report.

As Netflix expands its services to other parts of the world, including Latin America, Europe and Canada, free cash flow is likely to be negatively impacted in the short-term, but over time, may wind up benefiting the company greatly. Netflix added 1.4 million international subscribers, led by expansion into the Nordics and the Netherlands.

Hargreaves notes the momentum is likely to continue in those regions, as well as the U.K. and Ireland, due to incremental "likes" on Netflix's Facebook pages for those regions. "While it is unlikely that incremental Facebook 'likes' will correlate directly to net subscriber additions in their respective geographies, we consider it to be a positive indicator of Netflix's brand attraction in each geography, which should translate into subscriber growth."

As of the end of the third-quarter, Netflix had 9.4 million international streaming subscribers.

Aside from concerns about streaming subscribers and profitability, Netflix faces the major issue of net neutrality.

Recently, the Federal Communications Commission (FCC) recently allowed Internet Service Providers (ISPs) to charge variable pricing to businesses and individual depending on the amount of data consumed. Netflix accounts for a disproportionate amount of online data, and could have its margins affected, should the net neutrality ruling ultimately be the law of the land.

Wedbush's Pachter noted Netflix's EBITDA could be cut by more than half, if it decides not to pass on the potential added costs incurred by net neutrality. "If it decides to absorb these fees, we estimate net income per user could decline by  $1.00 per month, or $360 million per year, two-thirds of 2014 consensus EBITDA."

Whatever the issue may be, whether it's net neutrality, increased spending to add more subscribers, or increased content spending, Netflix shares are not likely to have a repeat performance of 2013. Investors may want to look at shares at much (mid-$200s) lower levels, where the upside is more prevalent, notes Pacific Crests' Hargreaves. "We continue to view Netflix as the leading non-live video distribution platform of the next decade and expect strong fundamentals for the foreseeable future. However, we believe NFLX prices in aggressive assumptions about long-term subscriber growth that leave little room for upside from current levels and create a slightly negative near-term risk/reward."

--Written by Chris Ciaccia in New York

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