A Potential Netflix Foe Bows Out
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For a company that's about to be crushed by competitors at any minute, Netflix (NASDAQ: NFLX) is looking safer by the day. After a week where the company's shares jumped 22% on a surge in bullish sentiment, Netflix saw a major potential threat, Dish Network (NASDAQ: DISH), give up its competitive challenge.
The pay-TV provider had planned to use the Blockbuster brand it purchased out of bankruptcy last year as a weapon against Netflix and its dominant position in the streaming market. But this week, pointing to a delay in regulatory approval, Dish Chairman Charlie Ergan said his company "no longer has plans to use Blockbuster as a nationwide video streaming or DVD-by-mail service." So it looks like Blockbuster won't be reanimated just for another chance at taking Netflix down.
This surprising piece of good news for Netflix comes on the heels of two eye-catching recommendations from Wall Street last week. On Monday, well-known investor Whitney Tilson pounded the table about Netflix shares, telling CNBC that he thinks the stock represents an outside shot at "a 10-bagger." And two days later, Citigroup reiterated a "Buy" rating on Netflix shares, with a bold $120 price target, a double from current levels.
But that type of optimism is still the minority view on this controversial stock. Dish's Ergan perfectly summed up the bearish argument on Netflix in a parting shot against the business, saying Netflix got a sweet deal early on as content costs were mis-priced relative to subscriber numbers. And now that content owners are wise to the game, Netflix is doomed if it can't dramatically increase membership to keep up with rising costs.
So who's right? Is Netflix a compelling investment from these levels or a money drain at any price?
I come down on the Citigroup/Tilson side of this argument for two reasons: overblown competition and rebounding consumer satisfaction.
I see the Dish network bow-out as an example of a key misreading of the competitive landscape that's had many investors write off Netflix's moat as nothing more than a mirage. Since content is all that Netflix offers, the argument goes, as soon as the content bids get high enough, Netflix's business model collapses. But if that thesis was right, wouldn't Amazon (NASDAQ: AMZN), with its large content investment, have made a dent in viewership by now? And HuluPlus, with its content industry backing, should have an easy time pawning off Netflix viewers. But at last count Netflix said that the company hasn't seen either competitor gain traction against members' viewing hours.
So bears have had to point at potential competitors -- currently the Coinstar (NASDAQ: OUTR) and Verizon (NYSE: VZ) streaming partnership that's coming soon -- as the threat that will be Netflix's undoing. In the bearish reading there always seems to be some company just over the horizon that's one content deal away from crushing Netflix. But this retreat by Dish Network shows that competing in the streaming market isn't as simple as just "buy content, make money."
And ultimately the weakness of competitors shows up in Netflix's customer satisfaction numbers. Citigroup found in its own survey that customer satisfaction levels are on the upswing for the company, with a growing chunk of customers picking Netflix as their first choice for streaming entertainment.
That reinforces what we learned this summer, that the company's overall satisfaction levels have rebounded from the 'Qwikster' lows and are bouncing back toward the Internet-leading levels they enjoyed before last year's unpopular price hike.
So I think that if Netflix can meet its own subscriber guidance when it reports earnings in late October, it should finally put to rest the idea that the company is due for a competitive shellacking any day now. Netflix has seen competition in the streaming market for years and still managed to build share while boosting satisfaction, even in the wake of its epic PR fiasco.
The fact that competition hasn't figured out a profitable way to arrest this growth means Netflix has something that's worth more than a market that's temporarily free from competition. It has a defensible competitive position that's getting stronger, not weaker.
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