Hold on While Riding the Netflix Rollercoaster

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

Up and down, this way and that. That’s the kind of course Netflix’s (NASDAQ: NFLX) stock has been taking in the past few days.

On Monday, the shares of the video subscription website went up 10% after a Morgan Stanley analyst upgraded his prediction and changed his target price to $85. On Tuesday, shares of Bank of America Merril Lynch changed the stock to “Underperform” from “Buy.” Last week on Wednesday, Citi analyst Mark Mahaney predicted great things for the stock and called it “a screaming buy” and that sent the stock again on an upward spiral.

One thing that comes out of all of this is that even regular watchers of the market seem to have no clue regarding how Netflix will streamline its revenue going forward. Netflix has traditionally subjected its investors to mad rollercoaster rides, so this October’s up and down pattern should come as no surprise to anybody who has been watching the company for a while.

The average trading volume for Netflix in the beginning of October was 3.6 million shares daily. At the end of the week, trading volumes soared to an average of 13.1 million shares daily. Then came the volatility caused by downgrades and upgrades by market watchers. This happened in August too when there was a 20% jump in the stock price following a 35% drop.

Well it doesn’t take a genius to figure out that such volatility isn’t exactly ideal for conservative investors, but there’s a bunch of people who are purely in the game for this sort of rollercoaster. Even for them, it might be a bit of a risk to invest in a stock which could swing the opposite way.

A few of the concerns that Netflix is facing include a slowing subscription rate and the question of how the company will pay for licenses to keep its content fresh and dynamic. The challenge of the falling subscription rate is something the company has been fighting ever since increasing its costs for hundreds and thousands of US based subscribers.

Competition in the form of Amazon (NASDAQ: AMZN) is heating up as you can see by the e-commerce giant’s acquisition of rights from cable network Epix. Epix is a partnership between Paramount pictures, Metro-Goldwyn-Mayer and Lionsgate. Epix previously had a deal with Netflix which had been paying $200 million a year since 2010 for exclusive rights. When that exclusivity expired, Amazon swooped in.

Amazon’s Prime Instant Video service has about 25,000 titles at the moment. That’s about half the number of titles that Netflix has in its repository. Both companies consider a single episode of a TV show to be a separate title. Barclays analyst Anthony DiClemente estimates that Amazon spends up to $1 billion a year on its content while Netflix spends $2 billion. Amazon offers streaming video on demand service as part of its Prime service, which charges $79 a year in the US for free two day shipping on most products that the company sells.

Amazon has long been a leader in the DVD rental space, one that is thinning thanks to consumer tendency to stream or download videos to mobile devices directly. Amazon’s line of tablets – the Kindle Fire are priced lower than Apple’s iPad so that it can be used to generate profit from the products that the company sells on its site including digital movies and TV shows.

Another competitor in the market for Netflix is YouTube, the familiar streaming service that is run by Google (NASDAQ: GOOG). The company has in the past 6-12 months gone on a hiring spree and hired talent from Hollywood. YouTube has gone on a bid to basically attract Hollywood’s talent directly. Imagine that in the near future, a wildlife and survival channel completely hosted and run by Bear Grylls on YouTube. This will help the channel create a lot of original content, something Netflix has done with its TV Show “House of Cards” by David Fincher and Amazon is hardly venturing into, instead just relying on plain vanilla ideas of old TV shows and movies.

Between the three companies spoken about, there’s no question that Google and Amazon will be a far safer bet – a lot more diversification. Not only do you have a better idea of which way the stock will swing when you wake up in the morning, their large basket of offerings also helps reduce risk.

However backers view Netflix as a bargain, having fallen 75% from its peak value about 15 months ago. They add that the company is doing fairly well with its original content and low cost TV series that have been previously aired. They also feel that risk brought in by competition from Amazon is being blown out of proportion. Ignoring competition, or rather pretending it doesn’t exist, however isn’t exactly a good strategy. Just ask Nokia.

Dig Deeper

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep pocketed, rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These kinds of issues are a must know for investors, which is why The Motley Fool released a brand new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to both buy and sell the stock. They’re also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Amazon.com, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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