At best, I am willing to give Netflix (NFLX) a "hold" rating at its current price of around $69. Once trading at over $300 per share in July of 2011, Netflix stock has plummeted to its current level.
Netflix must answer the numerous questions surrounding the company. What lead to the collapse of Netflix stock over the past year and can they fix what was broken within the company? Can the company transform with the ways of the home entertainment industry and the needs of its consumers? Lastly, should Netflix be concerned about the rise of its competitors?
Late in the summer of 2011, company determined they would need a large hike in subscription prices due to contract restructuring with some of its content suppliers. The price increases were in effect starting that September, and many Netflix users responded by cancelling their subscriptions.
CEO Reed Hastings responded by admitting Netflix had handled the price hikes in a poor manner, but made another misstep by declaring the coming spinoff and renaming of the DVD mail service to "Qwikster." These are just the main events in a series of complications that left Netflix stock spiraling down to $71 while management searched for a fix.
Netflix has most recently responded to its struggles by promoting Cindy Holland to Vice President of Original Content and Content Acquisition. Since consumers have increased their use of the streaming option, Holland's new job of acquiring content, especially popular television series, is extremely important. This is an attempt to bring in new management who will help develop the content Netflix offers and by doing so increase the value of the company to shareholders.
Although it appears Netflix is taking some measures to increase the value of its product, and in turn increase the value of its stock, I do not think its admission of fault in the pricing development and these changes in management will be enough to increase the value of the product. The company must find a way to keep transforming the service it offers to keep up with changing technology.
Netflix has successfully implemented the use of streaming online content onto computers and televisions, and it may be in the near future when it must completely rely on this service - DVDs could soon be obsolete. However, Netflix needs to keep innovating in the home entertainment industry to stay ahead of the curve, as cable and satellite services may start to offer a large variety of content for instant streaming just like Netflix currently does. Unfortunately, the next big thing in home entertainment is yet to be discovered, and Netflix's future as a successful company might be dependent on discovering it.
Not only will Netflix's future depend on its ability to implement the newest technological discoveries into its product, but also on the value its competitors have to offer. The best comparison to Netflix is Blockbuster, the former video store chain that is now owned by Dish Network (DISH). Blockbuster no longer relies on its stores, but instead offers online streaming, DVDs by mail, and express stations.
The DVD service offered by Blockbuster, known as Blockbuster Total Access offers an equally large variety as Netflix, but is more expensive. I do not see this as a huge negative for Blockbuster because the DVD services are on their way out with the continued success of instant streaming.
Blockbuster Express is the kiosk style DVD rental service that has been modeled after Coinstar's (CSTR) Redbox service. Although Blockbuster Express DVDs are more expensive than the DVDs offered by Redbox, and Redbox recently acquired over 10,000 Blockbuster Express kiosk locations, this is still a service offered by Blockbuster that Netflix does not - which is a win for Blockbuster.
While Netflix offers its extremely successful instant streaming for $8 per month, Blockbuster's instant streaming is price not on a monthly basis, but instead it is between $3 or $4 per rental. One major benefit to Blockbuster's streaming is the access to brand new titles, while Netflix generally offers fewer new titles. However, Netflix has a much larger variety of titles, with tens of thousands to pick from. Blockbuster instant streaming only has about 8,000 titles to choose from.
While it is not clear whether Blockbuster is a significantly better option in the home entertainment industry, it is clear that it is a noteworthy competitor that Netflix must stay ahead of if it wants continued success.
Verizon (VZ) has joined together with Coinstar to launch a new streaming option later this summer that is intended specifically to compete with Netflix and Blockbuster. This new service is targeting the thirty million plus consumers who use the Redbox kiosks. Furthermore, Redbox is looking to expand its Canadian services, as Canada is the third largest disc-rental market in the world.
Depending on the success of this new streaming option, Verizon and Coinstar are two companies whose stock could jump this summer and could be a great value for investors. For the same reason, those who currently own Netflix stock should keep an eye on it over the summer and be prepared to dump it if things do not improve.
Lastly, Amazon.com (AMZN) has introduced an expanded Amazon Prime Instant Video library. While it's home entertainment segment of business is not quite at the level of Netflix, Amazon now offers over 12,000 titles in its library and offers a lower yearly price as well. Amazon is always a dangerous player in any industry since it has a wide variety of resources at its disposal. Its push into more instant videos only bodes poorly for Netflix.
Between the mishaps that Netflix has endured over the past year, and the entrance of many serious competitors to the home entertainment industry through streaming and disc-rentals, I am extremely wary of Netflix stock and would be prepared to sell it at the sign of any other negative trends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.