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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

As it seeks long-term stability, Netflix may be worth the risk

Universal Uclick

Netflix’s (Nasdaq: NFLX) volatile stock was recently down about a third from its 52-week high, suggesting a buying opportunity to some. In the streaming video giant’s third-quarter earnings report, management missed its subscriber target and for the first time projected a year-over-year slowdown in U.S. member growth for the fourth quarter.

That’s important because it suggests Netflix could be at a saturation point in its biggest market, having already booked its biggest subscriber gains. And while international growth promises to dramatically expand Netflix’s addressable market, profits from that business are still a long way off.

On the other hand, international member growth is robust, and the U.S. business is generating big earnings right now, with engagement and retention levels at record highs. Profit margins are increasing both at home and abroad, too.

The company has more than 53 million global members as of its third quarter, and it added 3 million subscribers during that period. In the U.S., members top 37 million, or about one-third of all households, and Netflix is aiming for 60 million to 90 million subscribers domestically. Trends favor the company, too, with TV viewing declining and Netflix being the top destination for Internet users.

Netflix’s future is far from certain, but if you can stomach some risk and be patient, the company might reward you well in the long run.

Ask the Fool

Q: What kind of long-term return should I expect in stocks? – R.J., Corona, California

A: You can’t know for sure, but over many decades, the stock market has averaged close to a 10 percent annual return. Over just a few decades, though, it can offer less. Over the past 20 years, the S&P 500 has averaged 7.7 percent, and over the past 30, it’s closer to 9 percent. (For the “real” return, subtract the rate of inflation, which has historically averaged around 3 percent annually.)

Those returns reflect investments in the overall stock market, not in various individual stocks. Each individual company might end up trouncing or underperforming the market. You can hope to beat the market’s average return by carefully selecting individual stocks or mutual funds – or just settle for the market’s return, via an index fund.

My dumbest investment

In 1997, an ad in a church newspaper announced bonds that were paying 10.55 percent at a time when CDs were paying half that, or less. The cause was good, so I invested $1,000 in two-year bonds. Just before maturity, I received a letter that payment of the interest and principal would be delayed. Well, time passed, and I got more letters explaining delays (and also asking for donations!). I never got my 10.55 percent. – D.M., via email

The Fool responds: You might have noticed that the lowest interest rates you can get are often tied to government securities, such as Treasuries. That’s because they’re so low-risk. If riskier governments (such as shaky states or towns) or companies want to borrow money, they have to offer higher rates in order to entice investors away from low-risk ones.

Some of the highest rates around are for “junk bonds,” which belong to those corporations or organizations most likely to default. These days, some worry about junk bonds tied to shale oil ventures defaulting due to the falling price of oil. Always factor risk into your decisions.