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Why Netflix's Cuban Expansion Failed to Cheer Investors - Analyst Blog

Zacks Equity Research

Following Netflix’s (NFLX) announcement to launch its services in Australia and New Zealand, it is now growing its business in Cuba. The company offers its services to those in the region with Internet connectivity and international payment facility.

At $7.99/month, Netflix will air award winning shows such as House of Cards, Orange is the New Black, Marco Polo, All Hail King Julien and The Adventures of Puss in Boots. In addition, hit documentaries like Virunga and The Square will be included in the initial service launch.

With the recent expansion, Netflix became one of the first major U.S. companies to seek business opportunities in Cuba after the U.S. government decided to relax trade restrictions between the two countries. 

Netflix has been expanding its geographical footprint beyond the U.S. for quite some time now. The company entered Canada in late 2010 and has since expanded its business to Latin America and Europe. Last year, the video streaming company entered six European markets, including France and Germany, and plans to debut in Australia and New Zealand in the beginning of this year.

In addition, according to reports, Netflix is seeking to expand in the Far East by foraying into China. Given the intensifying competition and saturation in the U.S. market, we believe it is essential for the company to capitalise on the growing markets to counter any subscriber loss in the domestic market.

However, Latin America, which is currently going through significant economic and regulatory reforms, poses several hurdles for the growth of video streaming companies like Netflix. While Netflix has been operating in Latin America since 2011 and boasts 5 million subscribers, lack of proper Internet infrastructure in several regions may limit its growth opportunities. Further, lower income level and the limited use of credit cards pose challenges for Netflix, as its primary payment mode is credit card.

Furthermore, Cuba has poor telecommunication infrastructure even after the Obama administration lifted the ban on U.S. telecom companies providing telecom services in the country in 2009. So any major change in the infrastructure to facilitate smooth video streaming services seems difficult in the near term.

In Cuba, the average salary is roughly $20/month and only 25% of population can afford Internet connectivity, making it reportedly one of the least connected countries in the world. Therefore, it is difficult to imagine how expansion into the region will help Netflix .

In addition, the Cuban government exercises a lot of Internet censorship, making it difficult for Netflix to leverage its content to gain subscribers. As a result, investors were not impressed with the company’s decision leading to 0.29% ($1.29) drop in its share price to $443.07 at the close of trade on Monday.

However, the company expects the situation to improve in the future and believes Cuba to be one of the "green field" countries for telecom service providers. With development in Internet connectivity and greater access to international payment methods, Netflix expects long-term growth prospects in the region.

Netflix currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks which may be considered in this sector include PetMed Express, Inc. (PETS) with Zacks Rank #1 (Strong Buy), Autobytel Inc. (ABTL) and EVINE Live Inc. (EVLV) with Zacks Rank #2 (Buy).


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