Barclays cut Netflix (NFLX) on Tuesday from "overweight" to "equal weight," citing new competition in the movie rental business that may reduce the company's market share. Netflix reports earnings in two weeks. Analysts are forecasting a loss of 27 cent per share, on revenue of $845.6 million.
Verizon (VZ) teamed up with Coinstar's (CSTR) Redbox earlier this year to launch a subscription-based movie rental service, and Comcast (CMCSA) launched a new streaming service in February that directly cuts into Netflix's customer base.
Netflix should lose market share to Coinstar and Comcast. Over the next few years, at least, Coinstar and Comcast will probably be better investments.
- The 3-box reversal point and figure chart of Netflix reveals that NFLX is in a downtrend as price has not yet broken the downtrend line. Netflix is in a dead cat bounce and market cap could decline.
- Sales increased 26.31 percent over the past five years and earnings increased by about 42 percent. Earnings are expected to slow over the next five years to a 17 percent pace.
- Gross margin is roughly 36 percent and the profit margin is about 7 percent. If Netflix can increase the profit margin, the valuation could increase. Notwithstanding, margin expansion should be improbable with increased competition.
- The debt to equity ratio is 0.63 and the current ratio is 1.49. Liquidity and solvency are not issues that need to be addressed right now and may become problems down the road as Netflix struggles to stay relevant in a competitive entertainment business.
- From a customer's perspective it is difficult to find movies that are appealing using the service. Other firms produce a high quality, more satisfying product.
- Shares of Coinstar are trading above the trendline on the 3-box reversal point and figure chart. The specialty retailer is above the rising 50-day simple moving average. The company went through a period of accumulation that ended in early 2012 and is now in the markup stage when prices rise or the trend has turned from sideways to up.
- Sales have increased at a 28 percent pace the past five years while earnings have increased at a 40 percent pace. Earnings the next five years are expected to increase at a 17 percent pace. A pace closer to the firm's sustainable growth rate.
- The gross margin is below Netflix's as operating and profit margins are roughly equal to the firm's competitor.
- Coinstar's debt ratios are higher and the current ratio, a measure of liquidity, is slightly lower. Liquidity and solvency are currently not major risks to the firm's going concern.
- Coinstar offers a quality product, movies people want to see. The firm operates in a competitive industry. The partnership with Verizon is a huge positive for shareholders.
- Comcast is in an uptrend with trading taking place above the rising trendline after breaking out from a base that extends back to 2009 on the 3-box reversal point and figure chart. The stock is above the rising 50-day simple moving average.
- Sales the past five years have increased at a 17 percent pace while earnings per share increased at about 16 percent. Earnings the next five years are expected to increase at a 15 percent pace.
- Gross margin is comparable to Netflix, while operating and profit margins are above Netflix's.
- Solvency ratios and liquidity ratios are lower than Netflix's. Notwithstanding, liquidity and solvency are not concerns of Comcast investors.
- Comcast provides a high quality service, is a direct competitor with Netflix and a competitor that should win.
Coinstar and Comcast are better investments than Netflix. They provide a better product and should increase market share at Netflix's expense.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.