Small-Cap Spotlight: Netflix Not Worth Watching

This will put Netflix in the same position -- a competitive pricing war with higher marketing costs -- as when the company missed its quarter back in July.

Looking at the future, Netflix is basing its growth strategy on online video, which amounts to watching movies on your PC. Personally, I would rather watch a movie in high-def on my 52-inch LCD TV than my 19-inch computer monitor. With flat-screen TVs selling like crazy, it's possible, and even likely, that most consumers share my sentiment.

Looking past the PC, Netflix wants to make it easy and inexpensive for consumers to view its online video content through the television. But this initiative seems a very long time away.

In its last conference call, management said that it could take 10 years to get most of its content online and then stated, "We are exploring ways with a variety of partners trying to understand the best ways to provide inexpensive viewing of online content on television."

As of today, even the most tech-savvy guys have a hard time explaining how to download movies to watch them on TV in hi-def and surround sound. So getting the average movie watcher to do this in the short term is highly unlikely.

Netflix boasts a very strong balance sheet with almost $6 a share in cash and no debt. But shares are trading at 34 times next year's projected earnings on a company with a long-term growth rate of only 18% according to Capital IQ. Also, subscriber growth is projected to slow dramatically, dropping to roughly 19% by year-end 2007 from more than 50% in 2006.