Netflix

Netflix: is a company I admire; it’s product I enjoy; its stock I watch with envy. Just five years ago, a Netflix share was around $100. Today, it closed at around $560. That is a whopping 460% rise in the share price of the company. Just from the beginning of 2015 alone, the stock has risen more than 60% - that is, in the last 4 months.

This is a company where you could have the “felt” the growth over the years – a company that grew almost without any formidable competitor. I have to admit that I have been a Netflix customer for less than two years now, but even I “felt” it in this time period. As cable channels grow boring and repetitive filled with commercials every day, Netflix becomes interesting with ever changing content. Recently, I have also noticed that the content quality has vastly improved. What’s more? - For a crime/mystery/thriller fan like me, who is very much into the details of every scene and dialogue, the “rewind” option comes handy, which I don’t get it in regular TV. And that is just one lovely option amongst many.

Moreover, Netflix has a lot of room to grow in international markets and the company has tested only one kind of revenue streams so far – the subscription model. All this make me drool for this stock. And by the way, I have to admit that I have entered and exited this stock once with a small profit in the past. But I question myself: why did I exit so early? First of all, I entered this stock because of enormous growth potential. But I exited the stock (in hindsight too quickly – it was relatively a quick in and out) because of some of the same reasons why I won't enter again today –

·        The stock is trading at 130 times its earnings. That’s too high a ratio for me to be comfortable with.

·        I fear that the potential future growth in the international markets is over-estimated. Yes, in Europe, Japan, Australia and New Zealand, I see enormous room for growth. But in other Asian markets, I fear that Netflix might face a severe competition from piracy. Lack of proper high-speed broadband infrastructure in most of the Asian and African markets is not even discussed in Netflix’s strategy. And what about local content and their costs? And what about competitors in these international markets from local businesses? Like I said, I still see a lot of room for the growth in subscribers, but I just fear if the expectations are running too high that potentially could not be met due to the above mentioned reasons.

·        Competition is starting to pop up. I am amazed that Netflix has had too little competitors so far – who, by the way, were not even close to Netflix’s brand and growth. But I see that changing. Amazon Prime is a prime example. At first, I shrugged it off. But with their package model – where reduced rate (or free) retail shipping combined with video-streaming looks like it is working. Going forward, online shopping is going to be the norm, and amazon is well positioned to capture these twin markets of online shopping and video-streaming in one package offer. My opinion is that – currently, the pricing model of amazon is crippling its growth, but over-time, I think they might be able to work it out – especially given the fact they have multiple businesses under the same brand - which they can leverage.

·        Apple/HBO product could turn up to be another formidable competitor.

·        I tend to agree with people who say that Amazon or Apple/HBO need not necessarily cripple Netflix because the customers might go for both Netflix and amazon (or HBO) instead of choosing one among the many. But my problem is that this fact is already priced into the stock.  And what about more competitors? I am thinking that there is going to be many more companies before new competition fizzles out. I know Netflix has a first-mover advantage in the market, but the companies that will be entering this space in the future are ones who already have the infrastructure or will move so fast that it will be difficult to see a significant time-lag (remember, this is based on internet technology and not machine parts production).

 All this being said I still love Netflix. I so badly wanted in. In fact, an analyst recently mentioned that the stock could go to $900 a share. I might be completely wrong and would have missed a great opportunity, but because of its enormous price tag for a share where all the positives of the company are already priced in, I fear any negative can significantly bring down the stock price. Netflix has mentioned that they might do a stock split preceded by possible dilution – if they do, depending on the diluted price, I might look for a good entry point. But for now, I am going to sit on the sidelines while enjoying my Netflix shows.