Will Comcast and Verizon crush Netflix?
New services have begun to threaten Netflix's already thin margins.
This has been the year of new streaming video services. Coinstar's (CSTR) Redbox and Verizon Communications (VZ) announced this month that they will partner on a new service to challenge the market leader, Netflix (NFLX).
And two days ago, Comcast (CMCSA) unveiled plans to enter the competition by offering a streaming-video service to its Xfinity customers. In the future, Comcast is planning to make this service available on additional devices, such as the Xbox 360 and Android gadgets.
Shares of Netflix have reacted strongly to the news of increasing competition, with the stock down 11% since Comcast's announcement. Shares closed Friday down more than 1% to $111.67. The question is whether traders are overreacting or if the new competition actually poses a serious threat to Netflix.
A Dawson James analyst, Justin Colatosti, who has a sell rating and a $50 price target on Netflix, noted that even minor competition is a serious threat to Netflix, which already operates at razor-thin margins. Colatosti pointed out that Netflix's content costs are exploding, which significantly hurts the company's profitability.
Therefore, Netflix should make some drastic strategic changes, such as adjusting its content offerings. According to Colatosti, Netflix cannot offer everything for everyone, as the company's cash flow and growth rate don't support new content deals. The alternative option is to rapidly grow Netflix's subscriber base, but Colatosti said he does not see this as a feasible option because Netflix already captures approximately 50% of U.S. broadband users.
In fact, the company has been losing domestic subscribers, and Colatosti is not expecting international growth to offset these losses. He noted that Netflix is facing fierce competition in the United Kingdom and Ireland from Amazon (AMZN), and while Latin America would be the best option for international growth, it would take about five years until the demographics in the region are favorable.
Out of the new competitors, Colatosti sees the Verizon-Redbox joint venture as the most serious threat because it is the only service that will be available universally to all consumers. Other competitors' services, such as Dish Network's (DISH) Blockbuster@Home and Comcast, are only available to current subscribers and essentially serve as "sweeteners" to keep customers and attract a larger user base. Colatosti also mentioned that the larger competitors have the ability to run streaming services at a loss, whereas Netflix is more dependent on subscriber revenue.
Overall, the high dependency on subscriber revenue and increasing competition on the content front make Netflix very reliant on the growth of its customer base. This might put more downward pressure on the company's shares, which have rallied more 60% this year.
Traders who believe that Netflix can fight the competition might want to consider the following trades:
- Go long Netflix.
- Short Dish Network
Traders who believe that Netflix will get crushed may consider alternative positions:
- Go long Comcast
- Go long Coinstar
I left when I called one day for customer assistance and they hung up on me due to the call volume. The message even said so.
Since they had too many customers, I decided to help them with that and left. They will not get another penny of my money as long as I live.
Some days I even think about boycotting NBC just to deny Comcast the ad revenue.
If they bring their usual level of "service" to streaming video, Netflix has nothing to worry about.
Those big media companies want to stop Netflix because they are finally letting the consumer enjoy content without commercials. The world just seems brighter when you dont have obnoxious car commercials and Exxon propaganda thrown at your face every 15 minutes...
Rock on Netflix, I'm going long with guys!
I have no complaints about Netflix whatsoever.
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.