Netflix's Best Hope: Getting Bought

Buy me, please!

That should be the exhortation emanating from the headquarters at Netflix (NFLX - commentary - Cramer's Take). If the company rationally assesses its prospects for survival in the online DVD-rental market, the only reasonable response has to be "Buy me, please!"

The best-case scenario for Netflix shareholders is a sale of the company sooner rather than later. Netflix's news flow is likely to be positive over the next few months. But as time goes by, it increasingly will be evident to the market that the company is trapped in a no-win battle, and the stock price of the company will adjust accordingly.

It's conceivable -- but hardly likely -- that Amazon (AMZN - commentary - Cramer's Take) or Wal-Mart (WMT - commentary - Cramer's Take) will consider buying Netflix in the short term. Amazon doesn't participate in this market segment, but it is widely rumored to be considering an effort in this area. A purchase of Netflix would add to Wal-Mart's base of customers for its current online DVD-rental business.

Absent a buyer in the near term, though, my best guess is that Netflix is tracking on a path similar to that of eToys, a once-hot Internet toy retailer that ended up in liquidation, or possibly Netscape, once a leader in Internet browsers that was eventually taken over by Time Warner (TWX - commentary - Cramer's Take) at a price that was a tiny fraction of its all-time high.

Overpricing at Netflix

Related Stories

Get Positive About Buying Negativity

It doesn't matter if the product that Netflix delivers to customers today is of high quality. The company faces a competitive disadvantage that is structural. That was evident when Netflix lowered its three-movies-at-a-time service's monthly subscription price to $17.95 in an effort to undercut Blockbuster (BBI - commentary - Cramer's Take). Blockbuster quickly responded by undercutting Netflix, lowering its three-at-a-time service's monthly subscription price to $17.50.

Here's what the market is missing in overpricing Netflix's stock: The difference in the subscription price between Netflix and Blockbuster is much wider than it appears at first glance. Far from being a 45-cent difference ($17.50 vs. $17.95), it's actually a Grand Canyon-sized gulf. That's because Blockbuster provides online subscribers with two free DVD rental coupons each month (worth about $8), redeemable at any of more than 9,000 Blockbuster stores.

---

At time of publication, Alsin and/or ACM was long Blockbuster, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail].