No Country For Netflix?

Sep. 5.12 | About: Netflix, Inc. (NFLX)

In our article last week, we had maintained our position that Netflix (NASDAQ:NFLX) is still overvalued considering its international and domestic prospects. We particularly highlighted the competitive moves by Amazon (NASDAQ:AMZN) and the content deal with pay TV channel Epix. Amazon has now signed a deal with Epix that boosts its content library by 3,000 movie titles. The Epix deal further closes the content gap that existed between Netflix's and Amazon's streaming service. Netflix's stock price, which had earlier taken a beating following last quarterly results, is down by 6% following the news of the Amazon-Epix deal.

Deal Details and Competitive Environment:

Netflix had signed a deal with Epix two years ago. According to the terms of that agreement, Netflix was supposed to get exclusive license for movies from MGM, Paramount and Lionsgate for the first two years, after which Epix could sell the rights to other companies as well. Since the two-year period has passed, Netflix loses exclusivity for that content.

As a result of the Amazon-Epix deal, the same content can now be available to customers through other services like Amazon Prime, at prices lower than what Netflix charges for subscriptions. Netflix paid $200 million per year for Epix movies, and will keep them in its library through at least September of next year, although they are not exclusive any more. After losing the exclusivity, Netflix is still expected to pay $180 million per year.

Amazon's latest deal with Epix follows deals with other content providers like Viacom (NYSE:VIA), Warner Bros (NYSE:TWX), NBC Universal Cable, and New Media distribution, which have brought popular names to Amazon's content library. The multiyear deal with Epix brings popular movies like "The Hunger Games" and "The Avengers" to Amazon's streaming service.

With Amazon's pace of adding content to Prime Instant Video (which doubled last year from 11,000 movies and TV shows to 25,000), it will soon catch up to Netflix content (around 50,000). Once the playing field is even (in terms of content), Amazon will clearly have an upper hand, as its service is cheaper ($79/year vs. Netflix's $7.99/month). Consumers will also find less reason to subscribe to both Amazon and Netflix together. In addition, Amazon Prime bundles free two day shipping and Kindle books access with the streaming service.

On the other hand, according to NFLX's spokesman, Joris Evers, Epix content made up less than 5% of the videos streamed on Netflix. CEO Reed Hastings added that Netflix would not be "affected significantly" by the non-exclusive Epix content. We think that this is significant news, and it shows Amazon's intent to beat Netflix in the streaming video wars. Netflix faces significant uphill tasks of sufficiently growing its number of subscribers to justify continuous content investments and costs, as well as making its international operations profitable.

Other Netflix competitors include HuluPlus, HBO Go and MVPDs like Comcast (NASDAQ:CMCSA) in the U.S., and Amazon LoveFilm, Sky Movies and Sky's Now TV in the U.K.


Netflix is trading at very high multiples, with a forward P/E of 59x and EV/EBITDA of almost 12x.

Comcast has a forward P/E of 15x and EV/EBITDA of 6x. Time Warner Cable (TWC) has a forward P/E of 13x and EV/EBITDA of 7x. Thus, there is significant downside for Netflix.

To reiterate, we recommend against a long position despite the recent fall in stock price. Our investment thesis remains that Netflix faces tough competition and insufficient subscriber growth, which does not justify hefty content costs. Another red flag: costs attached to the announced international expansion into the Nordic regions will take the bottom line back into the red zone, too.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Consumer Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.