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Can Netflix Stay Afloat?

So, for as much criticism that Hastings have received recently, I think it is only fair he receives a considerable amount of credit for even considering this.

The question is will it work? I ask because upon the release of its first-quarter earnings report, the stock dropped 14%, the biggest decline since October. Though it has since rebounded modestly, there are yet some concerns about its ability to survive.

What continues to bother Netflix investors is the company's inability to sustain growth. During the announcement Netflix warned the subscriber total would drop in this current quarter, and as a result has started to shift its focus towards making money instead of growing subscribers. It has essentially admitted that subscriber growth has (for all intents and purposes) stopped.

While that may be cause for concern, it means the company is now prepared to start generating real value from the subscribers it currently has. In other words, even through its warning there was cause for optimism in that it now plans to focus on what really matters: earnings per share.

Bottom Line

While Netflix has some similarities with RIM, I don't think anyone can say that its management has been sleeping at the wheel.

As much as I enjoy the service as a loyal subscriber, it is still hard for me to consider that Netflix will be able to survive the onslaught that is certain to come from Amazon's Prime service as well as Apple and Google (GOOG), which have their own TV plans in place.

The question is, what would be left for Netflix outside of an acquisition if larger rivals start eating away at its margins? How much would it take to make a deal happen? With Netflix currently trading at $84 -- down from $300 one year ago -- would Reed Hastings and the board accept an offer from any suitor of less than $150 per share?

All of this notwithstanding, it goes back to Buffett's comment about being a successful investor. In this case, Netflix lacks the competitive advantage to make it through the long term. So, accordingly, though its streaming service comes highly recommended, the stock does not.



At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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