In May of 2002, Netflix, Inc. (NFLX) opened for trading at $15 per share. The stock currently trades at $474.15 per share. Are you imagining having invested your entire net worth in Netflix at the time? The only thing you can do now is attempt to figure out if there’s more room to run. Before you scoff at this possibility, consider that many investors said the same thing at $100, $200, $300 and $400 per share. However, that doesn’t mean Netflix’s stock will continue to appreciate at the same pace, or at all. What makes the Netflix situation unique is that the tailwinds and head winds are about equal. It’s also very difficult to determine what will happen within the industry given all the surprise announcements. But we need to start somewhere so let’s start with recent results.

2014 Results

In the United States for fiscal year 2014, Netflix's member count increased 17% year over year. However, net additions declined 9%. In other words, there is still growth, but not at the same pace. Average monthly revenue per member increased 2%, which is a positive for the company and its shareholders but not for its customers. Internationally, member count increased 67%, net additions jumped 53% and average monthly revenue per member increased 1%. Netflix currently operates in 50 countries, and it plans to launch in Japan this fall. Based on these numbers, there is clearly significant potential overseas. (For more, see: Five Reasons Why the Netflix Juggernaut Could Continue to Roll.)

Netflix suffered several cost increases, including a $242.3 million increase for exclusive and original programming, a $59.5 million increase for streaming delivery and $36.6 million for payment processing, fees and customer service. With annual revenue north of $5.5 billion, this isn’t a major dent, but it still impacts the bottom line.

One of the concerns for Netflix going forward is its burn rate. Can its revenue growth outpace cash burn, or will the company burn profits? An argument can be made either way, but if you’re looking at the company’s history, net income has consistently increased on an annual basis. However, this is still a threat to consider. Now let’s take a look at another threat. (For more, see: Burn Rate Key Factor in Company's Sustainability.)

Content Masters of the Universe

In a 2014 interview with GQ, Netflix CEO Reed Hastings said the following: “The goal is to become HBO faster than they can become us.” Whether or not Netflix is succeeding in this regard is debatable. If HBO can keep pumping out gems like Game of Thrones, then this will be a challenge. That said, House of Cards and Orange Is The New Black aren’t far behind in regards to quality. The HBO Go app was a preemptive strike against Netflix. And CBS Corp. (CBS) now offers CBS All Access. Then there’s Inc. (AMZN), which has attempted to steal share with its own original content, including Betas and Alpha House. Neither were very successful.

At the moment, it appears as though Netflix and HBO can coexist, that CBS isn’t a significant threat and that Amazon is losing the battle. But there have been rumors that Amazon might offer a standalone free ad-based service in the future. That would create an interesting dynamic. You would have many cost conscious consumers choosing Amazon, but there would also be many who would prefer not to deal with ads. What’s really ironic is that if this took place and succeeded, then the entire industry would have come full circle. Free television with ads is how it all began and remained for decades. (For more, see: Who are Amazon's (AMZN) Main Competitors?)

Though it’s very difficult to determine who will win the most share in the future, it’s a certainty that the percentage of homes connecting their TV to the Internet will increase. In the U.S., that percentage doubled between 2010 and 2013 (24% to 49%). If this trend continues, it means that there will be more cord cutting. Those former cable customers will likely sign up with Netflix or Amazon for the most part. It should be noted that Amazon offers a lot more segment diversification than Netflix. (For more, see: Will Hulu and Netflix Replace Cable?)

The Bottom Line

It is possible for an investment to offer an equal amount of potential and risk. Netflix is one of those rare cases. Meanwhile, consider staying away from cable and satellite companies. (For more, see: Netflix: Should You Buy or Hold or Sell?)

Dan Moskowitz does not have any positions in NFLX, CBS or AMZN.

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