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What the Netflix-Facebook Integration Says About Netflix's Stock

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Netflix (NASDAQ: NFLX) is among the ranks of stocks that don’t abide by their underlying fundamentals. But the move it made on Wednesday, after announcing a partnership with Facebook (NASDAQ: FB), was downright ridiculous! The market sent shares up $10 by the closing bell, and reached as high as $195 during trading hours. The fact that the market is so bullish on Netflix that it could move the stock so much on this relative non-news makes me fearful that the stock has become overpriced.

What’s all the ruckus about?

Here’s a quick overview of what Netflix integrated with Facebook will look like: Netflix users in the United States who opt in will be able to see two new content sections, “Friends’ Favorites” and “Watched by Your Friends.” They also have the option of sharing their viewing history on Facebook, although the option is off by default.

The fact is, we’ve known about this feature for more than two years. The only thing standing in the way of implementing it earlier was a 1988 law preventing the sharing of patron’s video renting history. Last year, Netflix successfully lobbied to update the Video Privacy Protection Act of 1988, and President Obama signed the bill into law earlier this year. Let the sharing begin!

What’s the value?

Bullish analysts argue that Facebook integration makes Netflix’s product stickier - cutting subscriber turnover. With thousands upon thousands of titles to choose from, users can be paralyzed by choice. Suggestions from friends make viewing decisions easier.

There’s also the idea that Netflix is essentially gaining free Facebook advertising every time one of its 33 million subscribers decides to share his viewing history with his friends. And it’s one of the best forms of advertising - an endorsement from someone you know.

But is there really a large population of U.S. Facebook users that don’t know about Netflix already? It’s unlikely that Facebook integration will attract new subscribers, but there is the possibility of current subscribers learning about content they didn’t know was available through Netflix. That could help reduce churn, if users keep discovering new content.

In the past, Netflix has reported churn rates of 5% per month. As subscriber numbers continue to grow, it will become increasingly important for the company to control turnover. Facebook integration is just its latest move in an effort to control that number after exclusive content deals with the likes of Disney and the release of new original programming like House of Cards.

Room for improvement

I don’t mean to completely bash the move by Netflix, just the market’s reaction to it. Integration with Facebook is certainly a step in the right direction for Netflix, but getting suggestions from friends is hardly a catalyst for growth.

Nevertheless, Facebook, and other social networking platforms, offer TV watchers the ability to take back what DVR and internet streaming took away from us – the shared experience. With video on demand and time-delayed replays, watching live TV is becoming a rare form of consumption. Meanwhile, social media integration becomes increasingly popular with each passing season and live television event.

If Netflix can find a way to integrate the explosion of social networking while watching TV further into its product, it could help draw subscribers looking to reacquire that shared experience while binge viewing on the weekend. There’s certainly room to capitalize on the second screen experience and integrate the Netflix mobile app with Facebook and Twitter. (Think time-stamped tweets and Facebook comments that pop up with your friends’ profile pictures during a show.) Unique features like that would be a real catalyst.

Who will do it better?

I don’t think Netflix is best positioned to exploit these potential features however. When considering who could do better, two technology powerhouses come to mind: Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG).

The rumor mill continues to spit out details of a potential television set from Apple. Google, meanwhile, has been integrating its software with TV sets for more than two years now. As the two biggest names in tablets and smartphones, the integration with a second screen should prove easier for either company than a third party. Additionally, Google can integrate social features with its Google+ social network.

Furthermore, both companies are already in the content distribution business – Google with YouTube and Google Play, Apple with iTunes video downloads – and are beginning to encroach on Netflix’s territory. A serious move from either company, along with television, tablet, smartphone, and social networking integration could spell quite a bit of bad news for Netflix.

Amazon (NASDAQ: AMZN), too, provides a potential threat. Now with 10 million Amazon Prime users, Kindle Fire tablets representing a significant portion of the tablet market, and significantly more cash than Netflix, there’s room for Amazon to create a more social experience with its streaming service as well.

While Netflix might have a first mover advantage, there’s no real moat preventing competition from making a similar move and vastly improving upon it. Apple has repeatedly shown that you don’t always need to be first to be the best.

Be fearful when others are greedy

One of Warren Buffett’s most famous rules is “Be fearful when others are greedy, and be greedy when others are fearful.” The fact that news that essentially equates to an ancillary movie suggestion engine can create such a significant move in Netflix’s stock shows how greedy Netflix investors have become even after the price has tripled in the last 6 months.

It’s time to be fearful that the market’s gotten ahead of itself on a company with increasing competition with big piles of cash to throw around, as well as increasing costs that it must fund with debt.

Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Apple, Facebook, Google, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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