Netflix - What the Increased Streaming Competition Means For You

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

Outsized profits attract competition. New entrants become envious of high valuation multiples and swoop in to claim part of a lucrative market as their own. This happened to Green Mountain Coffee Roasters (NASDAQ: GMCR) when it traded at high price ratios years ago. Investors who bought Green Mountain Coffee Roasters at high valuation multiples were met with horrible losses. 

Green Mountain Coffee Roasters Today

Single-serve coffee was once a staple of coffeehouses, but has since made the move to households across the U.S. The market is led by Keurig, which operates under Green Mountain Coffee Roasters - but other coffee companies are likely to close its lead. More competitors are entering the market with their own version of single-serve coffee machines.

new player, Bunn, will also have its single-serve machines out soon. Bunn makes beverage equipment for commercial markets. Its home machine will be called MyCafe, and will also be compatible with the single serve cups manufactured by Keurig - and this, even without license from the Keurig makers.

The Esio Beverage Company will also release machines that can make both cold and hot drinks, which expands the range of current brewers. Esio has licensed Wal-Mart (WMT) to sell their machine. Starbucks (NASDAQ: SBUX) is no different: its single-serve Verismo can make espresso and coffee, and can be bought online. Verismo will make its way to brick-and-mortar stores soon.

Despite the looming competition, Green Mountain vowed to be the leader in the market, attributing its success to customer loyalty and the quality of its products, among others. Green Mountain took over half the retail market in 2011, which was still lower than its market share than in previous years. Investors have not been encouraged, either: Green Mountain shares have also plummeted 80 percent. 

<table> <tbody> <tr> <td><strong>Ticker </strong></td> <td><strong>Company</strong></td> <td><strong>Industry</strong></td> <td><strong>P/E</strong></td> <td><strong>P/S</strong></td> <td><strong>EPS Growth Past 5 Yrs</strong></td> <td><strong>EPS Growth Next 5 Yrs</strong></td> </tr> <tr> <td>GMCR</td> <td>Green Mountain Coffee Roasters</td> <td>Packaged Goods</td> <td>11.83</td> <td>1.10</td> <td>75.36%</td> <td>20.60%</td> </tr> <tr> <td>MCD</td> <td>McDonalds</td> <td>Restaurants</td> <td>16.36</td> <td>3.18</td> <td>18.13%</td> <td>9.10%</td> </tr> <tr> <td>SBUX</td> <td>Starbucks</td> <td>Specialty Eateries</td> <td>28.4</td> <td>2.91</td> <td>15.43%</td> <td>18.11%</td> </tr> </tbody> </table>

Bear in mind that Green Mountain Coffee Roasters is expected to have plenty of growth going forward. Its historical and forecasted earnings growth outshine those of Starbucks and McDonalds. Despite this promise, it seems like the stock is being punished for falling from grace. Investors are afraid that its larger competitors will destroy Green Mountain Coffee Roasters. This fear has created a buying opportunity. Oh how the mighty have fallen. Green Mountain Coffee Roasters now trades a price-to-sales and price-to-earnings multiples that are far below Starbucks and McDonald’s. Once upon a time it was trading like a growth stock. It has since fallen to multiples which might qualify it as a value stock.

Netflix Has Room To Fall

The Netflix (NASDAQ: NFLX) of today is similar to Green Mountain Coffee Roasters back then in the sense that it trades at a high valuation and has attracted a slew of new competitors. The outcome could be just as tragic for investors who buy shares of Netflix at today's fancy valuation. Netflix could see a tragic price multiple compression as competitors strengthen their footholds in its market.

Netflix investors have seen huge price declines, but this does not mean shares are immune to more price declines. Consider the following data:

<table> <tbody> <tr> <td><strong>Ticker</strong></td> <td><strong>Company</strong></td> <td><strong>Industry</strong></td> <td><strong>P/E</strong></td> <td><strong>P/S</strong></td> <td><strong>EPS Growth Past 5 Yrs</strong></td> <td><strong>EPS Growth Next 5 Yrs</strong></td> </tr> <tr> <td>CMCSA</td> <td>Comcast</td> <td>CATV Systems</td> <td>17.17</td> <td>1.62</td> <td>16.33%</td> <td>15.56%</td> </tr> <tr> <td>CSTR</td> <td>Coinstar</td> <td>Specialty Retail</td> <td>9.57</td> <td>0.65</td> <td>40.25%</td> <td>17.79%</td> </tr> <tr> <td>NFLX</td> <td>Netflix</td> <td>Music & Video Stores</td> <td>97.34</td> <td>1.21</td> <td>42.53%</td> <td>23.23%</td> </tr> </tbody> </table>

Investors should be fearful of Netflix at current valuations. Its competitors are jumping into the streaming video market. Today the price-to-earnings ratio of Netflix is higher than those of Coinstar or Comcast. If the Green Mountain Coffee Roasters cautionary tale is foreshadowing, shares of Netflix could trade for less than the valuations of its competitors in the future. Watch out, and steer clear of Netflix.

Coinstar's New Plan Will Put Pressure On Netflix

Coinstar's (NASDAQ: OUTR) Redbox business has joined forces with Verizon (NYSE: VZ) to offer movie sales, rentals, and subscription streaming. This direct challenge to Netflix is expected to launch by Christmas.

So far, Redbox Instant has been tested by about 500 of Verizon’s employees. Its title list will initially focus on newer movies that are available for sale and rental. This service will compete against Netflix and Amazon (AMZN) for viewers who pay to watch movies and TV shows online and on smartphones and other mobile devices. This is a growing market with over $1 billion in subscriptions for the first half of 2012 in the United States.

Earlier this year, Redbox announced its plans to offer single title purchases for download and online. Customers will be able to easily download content directly to mobile devices, set-top boxes, and game consoles. Redbox Instant has yet to define its pricing strategy for its new streaming service, but Coinstar's CEO has mentioned that the venture is going to focus on value pricing.

Coinstar’s Recent Earnings Miss

Coinstar reported a drop in revenues as the company missed analysts’ third quarter estimates for its Redbox DVD rental service. The poor performance of the largest DVD rental business has partly been blamed on the London Summer Olympics competing for viewers and the weak set of films on sale during the period. Coinstar’s Chief Financial Officer Scott Di Valerio in an interview expressed that the company had foreseen the results, based on what they had to offer during the quarter. According to Di Valerio, “We knew going into the quarter that we didn’t have great new release content.”

Coinstar’s fourth quarter earnings are also expected to fall short of projections, but the company is working to avert a decline in results. It has partnered with Verizon Communications to test a service named Redbox Instant. The service seeks to combine DVD rentals with streaming to TVs and smaller devices and is expected to be operational by Christmas. Moreover, Redbox made a recent deal with Warner Bros that could boost sales: Warner Bros' movies will now be included in Redbox stalls as well as on Redbox Instant. Coinstar also hopes that “The Amazing Spider-Man” and “Marvel’s The Avengers” will be well received in the fourth quarter.

Conclusion

Valuation matters. It matters even when firms which seem to have no competition because their high growth and high margins can and often do attract the attention of other firms. Expect even more firms to jump into streaming video, and expect prices to drop as the market gets crowded.

Among these firms, Green Mountain Coffee Roasters and Coinstar look attractive. These two stocks are trading at low valuations in light of disappointment.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus