Before the year-end market rout, Netflix (NASDAQ: NFLX) was doing pretty well. By mid-2018, the stock had more than doubled, with no end in sight for the highflier. Then fears related to slowing customer growth and the ongoing market correction caused the stock to drop more than 40% from its peak. To put that into perspective, however, it's still up more than 25% so far this year.
While the company's growth story appears to be on track, 2019 could be a bit more challenging for the streaming giant. There are a number of factors outside Netflix's control that could weigh on the stock. Let's look at three of those.
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1. Rising interest rates
Over the past several years, Netflix has funded much of its growing content library with inexpensive debt. When the company reported its third-quarter earnings, long-term debt topped $8 billion. Shortly after, Netflix announced plans to raise an additional $2 billion, bringing its burgeoning debt above $10 billion.
Interest rates have been at historic lows for several years, allowing Netflix to raise money for content on the cheap. The gravy train may be coming to an end, as the benchmark 10-year Treasury yield has risen to 2.8% recently, more than double its rate from mid-2016. Netflix issued a $1.9 billion bond in April with a yield of 5.875%, up from the 3.625% yield on a $1.5 billion bond it issued the year before.
Rising interest rates will increase the cost of long-term borrowing for Netflix, which will result in slower content growth or a hit to the company's bottom line.
2. Growing competition
While increasing competition has always been cited as a stumbling block for Netflix, the environment will become even more competitive in the coming year.
If any rival has the potential to slow Netflix's growth, it will be multimedia powerhouse Disney (NYSE: DIS). The House of Mouse is expected to launch its company-branded streaming service, called Disney +, in 2019, and it will include movies from its four major studios: Disney, Pixar, Lucasfilm, and Marvel. In addition to its feature films, Disney is creating a host of original programming from its treasure trove of intellectual property.
Earlier this year, Disney CEO Bob Iger indicated that the service will be competitively priced: "I can say that our plan on the Disney side is to price this substantially below where Netflix is." The company plans to end its content agreement with Netflix in 2019, reserving its movies and television shows for its own services.
While it will never be a zero-sum game, the entry of Disney into the streaming fray could pose a challenge to Netflix's subscriber growth.
3. Competing in lower-cost markets
Until now, the majority of Netflix's growth has come from markets where its $7.99 basic plan and $10.99 standard plan wouldn't raise eyebrows. However, as the company works to expand further in international markets, that may be changing.
Just last month, Netflix said it would experiment with prices in certain markets in an attempt to boost its popularity in some parts of the world. Many streaming services in Asia, for example, offer monthly subscriptions for between $2 and $5 per month, much less expensive than even Netflix's cheapest offering. The company is testing a lower-priced mobile-only plan in developing countries. Malaysia is the first confirmed location, with a price equal to about $4 a month.
Another market that Netflix desperately wants to control is India, with more than 1 billion potential subscribers, where the company has been investing in top-shelf content to attract new customers. Currently, Netflix offers monthly subscriptions at $7.13, $9.27, and $11.41 at current exchange rates. For comparison, Hotstar, one of India's most popular streaming services, is priced at less than $3 per month.
Offering lower-priced subscriptions might boost market share, but it hit Netflix's bottom line.
Don't get me wrong: I'm a dyed-in-the-wool Netflix bull and expect the company's growth to continue unabated. Most recently, that equated to year-over-year subscriber growth of 25%, and revenue that increased 34% over the prior-year quarter.
Netflix has had an incredible run, bringing streaming into the mainstream, and disrupting the current television landscape. I expect that to continue, but things may be a little more challenging in the year to come.
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Danny Vena owns shares of Netflix and Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.