Netflix: a "Staying Alive" Story...
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While the bears have made a noted dent in Netflix's (NASDAQ: NFLX) stock price in 2H10, the stock has gone up and down since then. Moreover, the company's vulnerabilities should not be overstated. Netflix has more than 30 million streaming members in developed countries and is the world’s largest Internet subscription company for movies and TV programs. With the lowest monthly price for such a rich content library, it is a reliable source for entertainment. And even if online piracy becomes more rampant (consumers have already been made well aware of it), there is still use for Netflix's services. While I have mentioned before how "Netflix's business model ends where a Google search begins," I must confess that I too have an online streaming account with the beleaguered company. So should you buy the argument that the competition will destroy Netflix? Let's take a look.
Why You Should Not Buy the Competition Argument
In this month Redbox is opening up its services in a limited number of markets. The partnership with Verizon is particularly threatening, since it more directly targets the smartphone market. For now, Redbox is planning on having an invitation-only system for $8 per month. Nevertheless, Netflix has taken the appropriate steps to capture popular titles away from these competitors. The content deal with Disney (NYSE: DIS), for example, has catalyzed a positive market reaction. Theatrical releases may only start to hit Netflix's libraries in 2016, seven months after release, but it nevertheless strengthens Netflix's image as a "premium" content provider today. Reports from Netflix also show that Carl lcahn is very supportive of the current management. Icahn made his multi-billion dollar fortune through targeting beleaguered companies and often pushing for a board overhaul through a proxy fight. That he would not more actively target this company for change is a testament to how Netflix's management is taking the right steps to build value.
Why You Should Buy the Competition Argument
The CEO of the company has, however, expressed concern over the increasing trends in Amazon (NASDAQ: AMZN), which has north of 27 million subscribers. In a study conducted in November, a ChangeWave study revealed that although a large majority, 82%, of respondents prefer to use Netflix, a frightening minority, 22%, showed interest in Amazon. Further, the latter has seen usage increase by 1,400 bps. With access to such a large consumer population anyway (by virtue of being a leading e-commerce source), it is inevitable that Amazon would cross-promote this video service depending on the initial success. Given that trends have been solid to date, Netflix may find that 2016 is a little too late for the milestone Disney distribution.
It sounds good: Disney will exclusively stream first-rate Disney titles on Netflix from a variety of brands: Walt Disney Animation, Disneynature, Pixar, or Lucasfilm. But, ironically, Disney is also a part owner in Netflix's competitor, Hulu, and Disney is planning on investing more in Hulu. So, we could find out that much of this Disney-Netflix momentum will not come to fruition in the event that Hulu continues to gain momentum.
Ultimately, analysts are bearish on Netflix. The consensus price target is at more than a 25% discount to the prevailing price. As the company expands into international markets, content costs will continue to rise and threaten the business model. Thus, I recommend, at the very least, making an investment in Disney and Coinstar in order to hedge against downside.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Walt Disney, and Netflix. Motley Fool newsletter services recommend Amazon.com, Walt Disney, 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.