Avoid Netflix like the Plague

Sean 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) and Zynga (NASDAQ: ZNGA) look very similar to each other in my mind. Both stocks have spent the last year in decline, while the stock market has risen. Netflix has tumbled 72% since its high in July of 2011. Zynga has gone down 77% since its IPO roughly a year ago.

However, while I look at Zynga as a buy, Netflix is a clear sell. Let me explain.

First though, there are a couple positive factors for Netflix worth considering.

The stock has been gaining some ground lately. From a low of roughly $55 the stock is up to over $80 per share. While this might seem like a positive sign, I don’t think there is much future potential for this stock.

Netflix is currently fighting off a takeover bid by Carl Icahn who clearly wants to restructure the company and then sell it. This might cause various spikes in the stock price as the potential viability of this is worked out.

But this would be a poor factor on which to base an investment decision, especially as the board and particularly CEO Reed Hastings are so adamantly opposed to selling the company and have instituted a “poison pill.”

Icahn has stated that his interest in Netflix stems from its dominant role in the streaming movie business and the international growth opportunities. But I really don’t see either one of these as being a significant factor in Netflix’s favor.

Fundamentally Netflix has very little that is unique to offer. It revolutionized the DVD rental business by providing timely rentals through the mail. Netflix dominated this market and had minimal competition.

But the internet is faster than the post office and movie rentals are more and more frequently done through online streaming. Online, Netflix has a huge number of competitors.

Amazon (NASDAQ: AMZN), Hulu, Vudu, Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and dozens of free movie sharing websites all compete in the online streaming movie market. Amazon now offers a streaming movie service for its Amazon Prime members that comes out to be cheaper than Netflix while still providing thousands of movies and TV shows. Sure, the selection isn’t as large and the functionality might not be as refined, but for the thousands of people already using Amazon Prime this is a viable alternative to Netflix.

One of the biggest downsides to sites like Netflix and Amazon is that the streaming movies and TV shows are usually not the most recent.

For those interested in the latest releases, companies like Apple and Microsoft sell them through various avenues. Apple utilizes its iTunes store and Microsoft rents and sells movies and TV shows through the Xbox game console. Both of these are convenient alternatives for the millions of people who already use iTunes and Xbox.

Besides those options there are dozens of websites that allow you to stream movie and TV shows for free, though the legality is certainly questionable.

Because of the prolific competition, all of which provides a product comparable to what Netflix has to offer, or in some cases a distinct product since Apple and Microsoft offer the ability to rent new movies, I see little room for Netflix to grow with its current business model.

As far as international growth, Amazon, Apple and Microsoft are all able to compete internationally with Netflix. The free movie sharing websites are equally popular abroad, if not more popular. The opportunity for international growth seems like a moot point. Netflix doesn’t have any sort of unique international growth opportunity.

Netflix is facing tougher and tougher competition from more and more competitors and no longer has a monopoly on the market. I think Netflix is a stock to avoid until it can find a way to once again distinguish itself from the competition. 

SeanMSullivan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Microsoft, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Microsoft, 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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