Did Amazon's Earnings Signal End of Netflix?

NEW YORK ( TheStreet) -- Investors in Netflix ( NFLX) have a real problem on their hands. Management currently doesn't believe it's important to fully monetize its subscriber base. The mentality of Netflix management is akin to Nike producing one style of shoe. Instead of only selling one swoosh to each customer, Nike knows what Netflix's management hasn't figure out yet. Offering many kinds of styles and colors is a key to maximizing revenue and profits.

There have to be limits of course, but is it really appropriate for investors to have to sit idly by while the management team sets its goal for styles and colors at a grand total of one? Netflix's CEO Reed Hastings can do better than that for investors.

There is no question about the brilliance and business intellect of Hastings, as demonstrated by Netflix's crushing of Blockbuster. While highly impressive, we also see the same sort of thing happen with smaller family-run businesses from time to time. The owners and or management guide a company from zero to hero very quickly and then find they can't manage the growth anymore. Basically the company outgrows the management.

This is the key moment when management must decide if they are able to navigate in new waters and environment or not. If they can, everyone wins, but if they are not up to the task, we end up with is another flash in the pan "here today gone tomorrow" type of business.

I like Netflix as a service too. I watch mostly documentaries and some movies when I watch TV. Netflix streaming almost always performs well without any issues. Netflix has done a great job delivering what they do have in content.

Remember Palm, or how about Crocs, AOL and First Solar? These companies made big splashes for a short while, but their management teams where not up to the task of navigating through the vastly changed landscape.

It doesn't take too many tripped landmines before shareholder equity gets blown to pieces. Price increases, ease of use, programming and monetizing current customers instead of focusing on trying to gain more low-income producing customers - these are all landmines Netflix better not step on or step on again.

Apple ( AAPL), Amazon ( AMZN) and Google ( GOOG) are already doing much or all of what Netflix needs to start doing, and they were doing it a long time ago.

With Apple, you can buy a movie or song, you can rent a movie and the process is made simple and easy. Full-movie streaming on demand -- neither an envelope in the mail is needed nor waiting for it to arrive. Within five minutes a viewer can transverse from searching a huge library of movies to watching the opening credits.

With some differences, Amazon and Google offer the same thing. With a click of a mouse button you have Amazon Prime and with the click of another mouse button you're looking at YouTube or Google Play and full movies.

How can Netflix possibly expect to compete with any one of these three gorillas, much less all at once, while only offering one low-end streaming service? The answer is it can't, and every day that passes without Netflix expanding the offering, makes the challenge that much harder.

Trading NFLX

With the share price trading at new multimonth lows, it appears the market is reaching the same conclusion, gaining conviction day by day. Rocco Pendola has written many articles about the problems at Netflix, highlighting the risks right before the meltdown from over $300 a share.

Amazon makes it clear in their conference call they are fully committed to spending the money needed to capture market share including this space. Given how big Amazon is and how well it has executed in the past, its earnings report should be cause for concern for Netflix investors.

Interestingly I am not bearish in the very short term; after Netflix's crash into the ground this week I would expect a dead cat bounce. This should not be confused with renewed strength in the stock; it's more likely short covering.

If Netflix does bounce off the lows without improvements to its offerings, it will more likely than not become a short candidate than a value buy.

If you're long and stuck and wish "get out," look for the bounce as an emergency exit. I also never believe it is a good idea to play the amateur game of "I will hold just a little longer to try to break even." Professionals don't playing that game, for good reason, and neither should you.
At the time of publication, the author had no positions in any of the stocks mentioned, although positions may change at any time.

Robert Weinstein currently blogs, mentors traders, and writes several weekly columns in Rocco Pendola's Option Investing newsletter from his home in northern Wisconsin. Robert focuses on risk mitigation and relatively short-term market exposure. With nearly 30 years of studying and investing experience, Robert has experienced the many ups and downs in the financial markets and uses the knowledge gained to maintain balance. Robert believes the best way to make money investing is to avoid losing it. Robert is a voracious reader of financial related books often completing more than one book a week while not trading or writing. Robert contributes to his blog at paid2trade.com on a regular basis with an emphasis on studying behavior finance.