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The Netflix Horror Show Won’t End Well

Poor Netflix (NASDAQ:NFLX). Just like a bad horror movie, we know this isn’t going to end well.

The one-time growth giant obviously has seen better days — peaking at about $300 a share in 2011 before crashing to under $70 in just four short months. Hopefully, you are quite familiar with this meltdown of Netflix stock last year, and I don’t need to belabor it. (If not, here’s my eulogy from October 2011).

But investing is always about the future, right? Forward-looking forecasts and expectations of better sales and profits ahead no matter what is behind us?

Well, bad news, Netflix stock owners: The sequel to this horror show is going to be pretty bad, too.

Here are the risks, as I see them, to Netflix stock:

No profits: After a loss for the first three months of the year, Netflix put up disappointing earnings again in July. Guidance also was ugly — with a range that includes the potential for more losses both in the upcoming Q3 report and the Q4 report. Netflix is looking to barely break even this year, even if revenue continues to tick higher.

International Cash Burn: So why are profits scarce? Well, because domestic profits grew just 2% thanks to the rather expected decline of the DVD rental business. Also, international revenue growth — thanks to almost 4 million foreign subscribers — has been offset by the investments used to win over new viewers. Thus the paradox of overseas growth gutting the bottom line as NFLX invests in new markets and infrastructure. Long-term, this only works if the profits show up — not if NFLX cannibalizes its existing operations just for top-line growth. Netflix has dreams of being the “first streaming service to reach scale” in each market with a global reach, but that is far from an easy or guaranteed feat.

Original Series Gambles: If rumors are to be believed, the chief content officer at Netflix made an unheard-of $100 million deal with director David Fincher for two full seasons of a series called House of Cards. This is part of the NFLX strategy to become the “HBO of the Internet” with slick original programming that viewers can’t get anywhere else. Like the international gamble, this move only pays off if it shows up on the bottom line — and there are very real risks that the company could just be throwing money down a well. Creating a TV series isn’t like bottling water. There’s a quality factor that must be there. Netflix currently has four original programs either airing, set to air or in development.

Programming Misses: There was a huge spat last year when Netflix failed to renew Starz content, and it officially left NFLX in February. Lately, the content wars have continued to take a toll. Recently there is news that A&E shows like Pawn Stars will be gone, and that competitor Amazon (NASDAQ:AMZN) has nabbed movies like The Hunger Games as Epix exclusivity lapsed. Not good.

Competition: Speaking of Amazon, it’s worth noting that even if Netflix figures out its balance sheet and winds up airing slick original programming at home and abroad … well, NFLX constantly will have to look over its shoulder. There’s Amazon Prime — with slick integration into the Kindle HD, too. There’s also Apple (NASDAQ:AAPL) and its ubiquitous iTunes store and the appeal of the iPad and iPhone as streaming devices. There’s Hulu — the successful streaming venture from old-school TV shops NBC Universal, News Corp‘s (NASDAQ:NWSA) Fox and ABC parent Disney (NYSE:DIS). Heck, even Coinstar (NASDAQ:CSTR) and its DVD-dispensing Redbox brand is getting in on the action thanks to a partnership with Verizon (NYSE:VZ)! In short: Netflix is far from the only game in town.

So let’s review:

Netflix stock will go up if the company’s cash burn on international growth plans and original programming pays off in the months (maybe years) ahead, and if it manages to out-stream the competition and negotiate better content deals with better success.

On the other hand, Netflix stock could reasonably go to zero as competition heats up and profits dry up.

And consider this: NFLX has a forward P/E of 60 even after crashing 20% year-to-date and 80% from last July! So don’t fool yourself into thinking you are buying a bargain growth story here or a turnaround play. You are taking a huge gamble.

Stop watching the Netflix horror show. If you really want to play streaming, just buy Apple or Amazon.

Further Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple.

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Comments
  • Nate

    Wow, all this bashing of netflix, must be ready to pop any day now :)

    • MHC

      Agreed.

      I ask the author this… How can you criticize Netflix for breaking even while in aggressive expansion mode? Isn’t Amazon doing the same thing? How long have they gotten a free pass for reinvesting capital to raise revenue and gain market share? Why is NFLX different?

      There is no doubt Amagree NFLX has significant headwinds, especially in the area of content, but it is tiresome reading people bash the company’s approach to expanding their business.

      And why ridicule their attempt at creating original content? They aren’t claiming to be producers, they are outsourcing that to well known producers.

      I don’t know if NFLX will survive, but people are overlooking the value of their installed customer base which continues to grow. I don’t know anyone who complains about Netflix service, I know I have no reason to switch to Amazon or Apple. Between DVR, cable, HBO and Netflix, I don’t need much else. While I am curious about Hulu and Amazon, I am plenty satisfied. I am not in the market for a Netflix replacement, just a Cable replacement (Comcast/TW).

      • DLAL

        Couldn’t have said it better. Amazon is in it’s own tenuous position with their no-profit market expansions and if any stock is teetering on plunging it’s theirs. The stock market hates uncertainty which is reflected in current NFLX stock but the negatives in this article are likely positives for a company with an aggressive well thought out growth model.

      • http://twitter.com/JeffReevesIP Jeff Reeves

        For the record, I am no fan of Amazon right now because of its risky gamble. And in that case, Amazon is actually the best option for low-priced tablet buyers with its Kindle and has the scale of the entire Amazon network (Prime content, ebooks, etc) which has upside for monetization down the road. And bottom line is that if the Kindle fails Amazon stock may flop… but the company will be far from doomed thanks to its ecommerce biz. Netflix is taking the same gambles, yes — but has no fallback. I will not buy AMZN stock because of fear of a 50% crash. I won’t buy NFLX for fear of it going to zero. That may make me a chicken or a bonehead if proven wrong… but so be it.

  • Newskinnebula

    I agree with the other comments. I happen to keep my XBox 360 in my bedroom as it is not wired for standard cable. I use it for video games, sure, but i also use it for streaming content. I use Netflix most, and I host my own in-house server. I also occasionally use HBOGO which is great too, but of course limited to HBO’s programming selection. I think that the Roku, XBox and other streaming communities are being overlooked in these evaluations. I think that we don’t see things like the new Apple TV (not the box, the actual TV) that may come out will feature Netflix. Hulu is great for recently aired programming and I do think that Netflix really needs to get on updating their content, but it is coming. In the past few months I have seen more updates than in previous quarters.

    This is of course speculation and I am not a pro, but I do think Netflix stock is worth more than it is showing right now.