The One Stock I’m Still Not Buying
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You know that one stock that you really want to buy but as you peer into their future, you’re just not comfortable with what you see. Well, I’ve watched the rise and fall of Netflix (NASDAQ: NFLX) with great interest over the years and its recent fall has me wondering if I might have another chance to buy into world beating future returns. Yet, as I ponder the potential outcomes of this DVD direct mail darling, I just don’t feel comfortable allocating any of my capital and finally buying shares.
If I were to boil down my concerns it comes down to their poor capital allocation choices, their competition for online streaming and their issues securing content. Netflix, I think has become more of a trader's stock; keep them happy and away we go. A big problem with Netflix of late is that they simply haven’t been keeping traders happy and the stock has been pounded, leaving long term investors feeling quite dizzy.
For me, being able to trust management is right up there with the value proposition offered by each investment opportunity. I’m just not comfortable trusting the management at Netflix. While CEO Reed Hastings posting on Facebook about subscriber growth or his going toe-to-toe with a short seller in the media are what I would consider mere distractions, the company has made some severe capital allocation decisions that have really cost shareholders. The company buying back $199.6 million worth of stock for an average price of $221.90 a share and then three quarters later selling $200 million worth of stock at 70% less ranks up there pretty high as far as the biggest wastes of shareholder capital. It is going to be hard for them to create long term value for shareholders when they can destroy it that quickly.
While management’s recent decisions are questionable at best, the real question is whether they can get online streaming to be their future profit driver. We all know that they were a first mover in this emerging content distribution platform, yet they’ve been unable to translate that into real lasting success. It was thought that their existing customer base and their brand would be a competitive advantage, but it just hasn’t turned out to be the case. Competitors like Amazon’s (NASDAQ: AMZN) Prime service or Hulu are providing viable alternatives to Netflix and are competing on both price and content.
That brings me to my last point of concern, their increasing lack of content. If you’ve ever heard a former Netflix subscriber talk about their experience they’ll usually tell you that they dropped the service because they simply ran out of things to watch. We all know that content is king, so if you don’t have the content customers want and they can get it elsewhere for a comparable price then you are in trouble. Hulu’s owners include three top content providers: Disney (NYSE: DIS), News Corp’s (NASDAQ: NWS) Fox and Comcast’s (NASDAQ: CMCSA) NBC Universal. When you have Amazon undercutting you on price on the distribution side and then three of the best content providers competing directly with you via their own service it doesn’t take long for that competitive advantage to begin to erode.
It’s not just on Hulu though, Comcast is a company in danger of being disrupted and having their customers cutting the cord on their cable service. Instead, they went out and acquired content and are now competing directly to the consumer through their Xfinity service which provides customers with access across multiple devices. They and their content brethren can either charge Netflix a premium for the content or cut them off and distribute it themselves. Both Disney and Fox allow you to watch some of their content online at no cost. While movies and TV shows are apples to oranges, it is a competition for the eyes and ears of consumers and if they can be entertained elsewhere they’ll quickly forget about Netflix.
After all this I haven’t even mentioned the whole Qwickster debacle, but that’s in the past and we’ll just leave it there. I just don’t feel confident in the future of Netflix. Yes it has grown revenue by 24% and earnings by nearly 29% each year over the past five and is now just trading at 30 times earnings. It’s just no longer clear whether they’ll be able to continue to grow at that same pace, and that’s why I’m just not going to be buying this stock anytime soon. Am I missing something? Sound off in the comment box below.
latimerburned owns shares of Walt Disney. The Motley Fool owns shares of Amazon.com, Walt Disney, and Netflix. Motley Fool newsletter services recommend Amazon.com, Netflix, and Walt Disney. 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.