Why Netflix Is A Speculative Play At Best

| About: Netflix, Inc. (NFLX)

It is widely known that Netflix (NASDAQ:NFLX) was once the adorned leader in the online streaming industry. But in the past few months, things have changed dramatically for its investors. Competition has rapidly increased. Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have entered the streaming business with deep pockets and a very competitive attitude.

Amazon is entering the streaming business. It announced a deal with Epix in September to add 2,000 movie titles to Amazon's Prime streaming service. The movies included "True Grit," "The Avengers," and "Hunger Games." Amazon could be the biggest threat to Netflix since it has plenty of experience undercutting competition by offering lower prices.

Apple wants to enter the streaming business through a less risky route. It was rumored it would offer a la carte options for all kinds of videos, shows, and movies. It wants to profit when customers buy or rent videos through iTunes. Apple's pricing will be more expensive than Netflix's, but it offers an even wider selection of titles.

Google's YouTube is both a social network and a streaming platform. Already, it is relentlessly pursuing the audience held by Netflix, Apple and Blockbuster. The latest indication of YouTube's increased efforts is a new deal with Paramount that will deliver boatloads of fresh and familiar content to YouTube.YouTube users will be able to rent hit flicks from the entertainment giant, like "Hugo," "The Godfather," and "The Adventures of Tintin." According to You Tube website, it has more than 800 million users. Netflix will face a great problem if Google decides to profit from You Tube via advertising and paid content.

Comcast (NASDAQ:CMCSA) announced recently it would begin offering a streaming video service dubbed Streampit, while Verizon (NYSE:VZ) recently announced a streaming partnership with Redbox operator, Coinstar (NASDAQ:CSTR). Unlike Netflix, these rivals will not have to depend on low-margin videos streaming for any material portion of their profits. So, when news broke that Microsoft wants to acquire Netflix, I feel it will be respite for the streaming giant. Microsoft 's acquisition provides an opportunity for Netflix's investors to breathe a sigh of relief. It could be a great asset in the war for survival. However, does that make Netflix a good choice for new investors?

No. I think new investors should avoid Netflix, especially if Microsoft or any other big player does not purchase the company.

Netflix announced third quarter results that showed revenue reaching $905 million for the quarter, up from $822 million last year at the same period. Netflix reported earnings per share at $0.13, compared to $1.16 last year. Both earnings per share and revenue met Wall Street's consensus forecast of $0.05 a share and $905 million revenue. Netflix reported 25.1 million US subscribers for the quarter, adding 1.16 million to the previous total figure. This compares favorably to its forecast of 1million to 1.8 million new subscribers. The company previously forecast it would add 7 million domestic subscribers this year. It has added 2.1 million through the first half, and the fourth quarter is always a huge one for the company.

To get more subscribers, Netflix has successfully shifted to the international front. It added 690,000 new people in the quarter, bringing its total customer count overseas to 4.31 million. After Netflix's first international launching in Canada, it turned to Ireland, United Kingdom, and Latin America for customers. It then expanded into the Scandinavian countries of Norway, Denmark, Finland, and Sweden.

Netflix has a market cap of about $3.7 billion, but its stock trades at roughly half of its 52-week high. The company has widespread distribution in smartphones, tablets, PCs, TVs, and Blu-Ray players. Despite its struggle to increase its subscriber base, it remains an iconic brand in the streaming video business.

However, there are serious questions regarding Netflix's long-term viability on a stand-alone basis. In the summer of 2011, it announced a separation of its DVD and streaming services, which meant high prices for subscribers. The poorly executed price hike and the botched attempt to split its streaming and DVD-by-mail business backfired. Angry subscribers left Netflix, infuriated by the Netflix's decision to hike prices.

When Comcast announced recently it would be offering a streaming video service dubbed Streampit, Netflix's shares fell around 10% over two trading sessions. Since Streampit will offer streaming movies and TV shows to Comcast's 22 million customers for around $5 a month, Netflix panicked because it could lose customers. Comcast's customers could drop Netflix's more expensive streaming service.

The streaming business is an inherently low-margin business. Thanks to the high licensing fees Netflix pays for content it offers to subscribers, Netflix must find a means to make profit for the streaming business, especially when it wants to jettison the high-margin DVD-by-mail service. With Comcast, Amazon, and others entering the business, Netflix could be in a fix because licensing fees to use content could rise.

Under this circumstance, a purchase by a big player like Microsoft (NASDAQ:MSFT) seems like a very reasonable idea that should be beneficial to Netflix. I think speculators could make a killing if the purchase becomes a reality. Current shareholders should continue to hold. However, investors looking from the outside in should steer clear of Netflix.

Of course, at a price-to-sales of 1.09, Netflix's stock is competitive to Amazon's at 1.08 and an industry average of 1.09. However, Netflix has been looking vulnerable lately. Its competitors look threatening, and Netflix needs money to finance a program for expansion. Given all this, I believe at current price of around $76 per share, Netflix should be avoided. Speculators could do very well here, but they will need to watch closely to see if a big player makes a purchase.

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.

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