Facebook Sends Netflix Soaring - But Why?

| About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) seems to be buzzing the market quite a bit these days. After partnering up with Facebook (NASDAQ:FB) last week, the shares went up by $10 and closed at $195 at the end of the day. Such fluctuations have made me realize that Netflix might just be one of the overpriced stocks out there.

So what happened?

Netflix users now have the option of viewing two new content sections "Watched by your friends" and "Friend's favorite." They also have the option to view their history on Facebook. Though everyone knew about this feature for the past two years, a 1988 law prevented sharing of patron's video renting history. Netflix was able to successfully update this 1988 law (Video Privacy Protection Act) last year and now President Obama has signed the bill into law.

Basically, sharing video via Netflix is now legal.

How does this help Netflix?

Analysts suggest that with this new feature, users will no longer be stuck in selecting what they'd want to view. Suggestions from friends would be more compelling than normal customer ratings. The biggest advantage for Netflix is the fact that they'd be getting free advertisement via Facebook every time a user shares his viewing history. The best form of advertisement is endorsement from someone you personally know.

It'll be tough to find a U.S Facebook user who isn't aware about Netflix, but users would be able to find out new and the variety of content available on Netflix. Though it might not help Netflix in increasing the total number of subscribers, it'll increase the overall usage of their service.

With the release of their new series House of cards, it'll be important for Netflix to control the company turnover.

Scope for improvement?

It would be unfair to say that the market reacted to a Netflix announcement for no reason. There is definite potential to a Facebook and Netflix partnership, but getting your friend to share on Facebook is hardly a reason though.

Posting live comments on TV shows and live programs is the present trend going on in social networking sites. If Netflix can implement an optional feature to add real time comments through their apps it would be another strong reason for people to opt Netflix. Monitoring social networking trends and introducing features would help them stay in the game for a long time.

Who else would do better with social networking?

Netflix might not be able to make full use of their latest tie up with Facebook, but two tech giants that would be able to do better are Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).

Apple TV rumors having been floating around for a long time and Google has already integrated software to various Smart TV's. The success of both these companies in the smartphone and tablet sector justify that they would not require a third-party involvement as far as social integration is concerned. Google would be in a better position as they could make use of their already existing social networking platform "Google+."

Apple and Google have their own music distribution business - Google has Google Play and YouTube, whereas Apple has iTunes video downloads. Media streaming is an area where both of these companies are looking forward for more growth; any announcements made in the near future might derail Netflix.

Let's not forget Amazon (NASDAQ:AMZN); with over 10 million Kindle users, Kindle fire tablets are contributing to a significant share of the tablet market and relatively more cash that Netflix, Amazon would want to be on their tip toes and ensure their streaming services have an effective social experience for users.

Though Netflix has made the first move, Apple is known for coming in late and stealing the show.

Hence, let's all not get too excited

Netflix's recent stock movement makes it clear that investors expect more from Netflix even though the overall stock value has tripled over the past 6 months. A bit too greedy?

Netflix is competing with companies that have huge funds at their disposal, whereas the increasing operating costs Netflix incurs has to be dealt with through debt. I feel the market has gone well ahead of Netflix.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.