This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Netflix's High Stock Price Is Indefensible

Netflix currently benefits from the so-called "first-sale doctrine." The first-sale doctrine is a legal precedent, allowing the company to pay just once for each DVD or Blu-ray disc and then rent it out an unlimited number of times to customers to generate sales and profit.

This system is fundamentally illogical and already fading. Film studios bear the cost of investing, filming, editing and marketing content and Netflix, and before it, movie-rental chains such as Blockbuster, bear no risk and enjoy seemingly unlimited aftermarket rewards without paying a percentage to studios. As content migrates online, eventually all devices will be synched to the Web, and all video will be streaming. Netflix doesn't own the Internet, or even any content, so its only bargaining chip with studios will be its technology platform and customer base, which has no incentive to stay with Netflix, unless the company has the best prices and offerings. Netflix has no competitive advantages in streaming so, eventually, it will suffer margin compression, at best, and a potential mass-migration of customers, at worst.

The debate is not if, but, when, this will occur. Whitney Tilson and others argue that it is already occurring. Value-oriented Morningstar issued a report last week, suggesting that Netflix's stock is well above fair value. The researcher is keen on companies that possess an "economic moat", some advantage that keeps competitors at a perpetual disadvantage. Netflix lacks this moat. In terms of hours of entertainment delivered, streaming is already outpacing DVD. According to Tilson, who lists the top 100 films from the American Film Institute's list, Netflix has streaming movie offerings inferior to those of Apple (AAPL) iTunes, Amazon (AMZN) OnDemand and Vudu, partially owned by Wal-Mart (WMT). For streaming television, Tilson ranks Netflix fifth, behind Hulu and others.

Netflix's major studio deal is with TV channel Epix, allowing it to stream movies from Paramount, MGM and Lions Gate 90 days after they're first shown on television, which is roughly three months after the DVD release. This presents a huge lag between DVD release and the movies showing up on Netflix streaming, but Netflix purportedly pays $200 million annually for this deal, a significant sum relative to its cash-flow intake and liquidity balance.

Another deal, announced in December with Disney (DIS), to stream television content from ABC, ABC Family and the Disney Channel, is costing Netflix $150 million for just one year of use and, again, with a notable lag between run date and streaming release date.

2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
NFLX $621.87 -0.18%
MORN $77.04 0.03%
AAPL $132.54 0.88%
FB $80.54 0.07%
GOOG $540.11 -0.44%

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs