Is It Finally Time to Buy Netflix?

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

If there is a more maligned company in the market than Netflix (NASDAQ: NFLX), I am loathe to discover it. While adding another voice to the criticism seems like something more than unnecessary, as the stock is skidding along just above its 52-week low, you may be tempted to put the stock back on your radar. Additionally, the stock seems to have garnered renewed interest from institutional investors, especially hedge funds. Despite these positives, as competitors continue to up their offerings, Netflix remains a stock to avoid.

The Netflix Industry

The streaming video industry was essentially created by Netflix and quickly became its space to lose. For the record, I am a Netflix subscriber and see both the merits and the shortcomings of the service. On the positive side, I can get access to my account from every device I own. This makes the company’s video content very portable, which is a huge convenience. On the downside, available content has not improved at the rate one would like and when things go wrong, they implode. As to content, while I don’t expect every new release to be instantly available, classic movies should be easy to find, and they are not. On the service side, glitches tend to persist for an entire night, not a few minutes.

As an investment, the company continues to maintain its first-mover advantage in the sense that it has a sizeable subscriber base that seems to have stabilized. After a significant exodus surrounding the enormous price hike the company experimented with a year ago, Netflix’s core base has leveled out while the company looks for growth in foreign markets. Initial indications are underwhelming as to that growth, but it is moving in the right direction.

The Competition

While Netflix continues to struggle with getting its house in order, the competition is coming hard. Comcast (NASDAQ: CMCSA) continues to build its “Streampix” service as a direct alternative to Netflix and has the advantage of the company’s vast reach into the content space. The product seems to be initially aimed at maintaining current customers at higher subscription levels – it is free for those with a high enough level of service –but it is hard to imagine the options will not proliferate as the service matures.

Apple (NASDAQ: AAPL) TV continues to develop amongst rumors that the company is preparing to release a game-changing set-top box.  This option aside, Apple’s true advantage here is likely in its ability to offer access to content from any and all providers. In addition to iTunes, you can use Netflix or Comcast through your Apple device; this is a factor to watch as the market continues to shift.

Currently the two biggest threats to Netflix are (NASDAQ: AMZN) and Coinstar’s (NASDAQ: OUTR) Redbox. The recent release of Amazon’s new Kindle Fire line, in addition to the company’s new content agreements, should bolster its streaming video offering. Amazon Prime, which includes the network connectivity that will power the devices, offers an enhanced level of content at a lower price. Amazon’s release signals the importance of the market heading into the holidays, just as Redbox prepares to roll out its own streaming service. Redbox has attained a fiercely loyal following that is likely to explore its offering before any others, particularly since it will include access to a set number of physical rentals per month.

Institutional Activity

Recent writings and research reveal that institutional interest in Netflix has been increasing over the course of the year, even as the stock has languished. Industry watchers have noted from public filings that several funds have acquired large blocks of shares over the last few quarters, raising the question of whether the pros know something that retail investors should pay attention to. This becomes more interesting when considered against the message coming out of Netflix itself.

CEO Reed Hasting recently stated, “Over 20 years, Internet video is going to rise very steadily across many sectors. If an investor believes that Internet video—with its pure on-demand model—is the future of video, then Netflix becomes a very interesting part of their portfolio to ride that long-term thesis.” What retail investors must understand is that most hedge funds have the capacity to buy blocks of shares that are intended to be held over the course of years. While these blocks seem large, they may not be relative to the size of the overall portfolio. A fund manager can take the position that if the shares sputter, the overall impact on performance is minimal, but if they explode the upside is worth the limited risk.

This perspective does not work for smaller investors with less immunity to fluctuations. While it is always preferable to take the long-term view, this must be balanced against your ability to endure losses. As such, there is still too much risk in Netflix at current levels to make it more than a speculative play. The company may ultimately perform, but over the medium-term, it has not demonstrated any ability to create positive alpha.

Know What You Own

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.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple,, and Netflix. Motley Fool newsletter services recommend, Apple, 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.

blog comments powered by Disqus