Netflix used to be the apple of investors. It was a cash cow – making money and blasting quarterly earnings. That was then – Netflix seems to be an also ran company these days. It seems to be going through the path that destroyed its vanquished competitor, Blockbuster which Dish Network bought. It does not look positive for Netflix investors these days and Tekedia cannot see the bull. Within the last one year, the stock price has fluctuated by more than $200.
A little background. Netflix is still the leader in online video streaming. It is also a leader in distributing DVDs. In the last few months, Netflix has lost more than 500,000 subscribers and excess of $9.5 billion in market value. It created a new website sorely for the mail DVD and separated the online streaming from DVD business. It later dropped the plan in Oct 10th. That confusion and lack of strategic vision like what one saw under ex-HP boss, Leo Apotheker, has cost the company.
The following are concerns why investors must be careful with this company:
- Netflix customers are not happy. They are angry with the company. Why competitors are looking at growing their base, Netflix is worried to just keep its users.
- The persistent high unemployment shows that most of these services are not truly necessary. When prices increase, customers will find alternatives. That is what is happening in Netflix. Until Netflix changes its price and cut the last increase, it may not be an investable stock.
- The cost of programming is rising. What this means is that Netflix has to spend more money to acquire its digital assets. That will cut their margin in the long-run. When they got into this business, the assets owners did not know how lucrative this business was. Not anymore. They have all the armor and are asking for more cuts. That is one of the most challenging problems for Netflix.
- Netflix will surely need some financing to pay for the programming costs. It plans to spend $2 billion in 2012. According to Bloomberg, it spent less than $800 million few years ago for the same assets. This higher cost is the pressure on Netflix to increase fees so that it can recoup the expenses. Unfortunately, few things go high in the digital domain -blame Moore’s Law.
- Netflix will lose its popular Starz contents as the company will no longer allow it to stream it. This is very huge challenge to this company. Unless Netflix can find ways to get Walt Disney and Sony Pictures from where Starz licenses the contents, Netflix is in trouble.
- Netflix will need to raise new funds as it works to get new deals with Dreamworks so that it can keep its customers
- Does the CEO of Netflix still understand the business he created? Has he lost the swagger? His strategic mistakes are many. This is the major problem in this company. He is making this company look like a casino where any move is expected by luck to yield a jackpot. Netflix CEO has lost my confidence.
- The middlemen model is going to be extinct soon. There is nothing that stops the content owners from opening websites and run this show as Netflix does. Paramount studio is already doing this through the Transformers where it bypassed Netflix to get to the customers directly. If other owners follow, Netflix is done.
- Blockbuster is back – Netflix needs to uncheck Blockbuster destroyed. Why? Dish Network is bringing Blockbuster Movie Pass that brings both streaming and DVD delivery. This is what Netflix does.
- Microsoft plans to get into this business. Google and Amazon are already into this streaming business. Hulu is emerging and coming up.
- Did I mention the $1 RedBox? You betcha!
So, in summary, there is no reason to see any BULL around Netflix. I will not put my money in it.