Why Netflix is a goner

Think this stock can't go any lower? Wait until it's squeezed out and you could be in for a harsh surprise.

By InvestorPlace Nov 4, 2011 9:04AM
By Lawrence Meyers, InvestorPlace.com

It wasn’t that long ago that Netflix (NFLX) was destined to become a category killer. Its disruptive business model of delivering DVDs by mail coupled with its availability of long tail content became so successful that it brought down mighty Blockbuster Video.


But a funny thing happened on the way from a stock price of $8 to $300: Netflix itself began to fall apart even as its shares soared.


That means the peak numbers could be dramatically inflated, and that the lows are still a long way down from here.


In the past few years, technology has caught up with Netflix — then blown past it — and along with it came a different way studios permitted content to be used. Netflix, or anyone else, can purchase a DVD and rent it out as often as they like. However, streaming content has to be licensed. The world started to move toward streaming content, and it still is. NFLX simply does not have the fiscal resources to license enough material to remain competitive, much less become a category killer.

 

Post continues below:

Investors need to understand that DVDs will be gone within five years or, more likely, three. Just like CDs have given way to digital files, so will film and television. Netflix’s DVD business will be dead, and it only will be able to rely on streaming — and NFLX at least realized this when it split up its streaming and DVD businesses.


The problem is that streaming licenses are incredibly expensive. Multi-year deals can cost hundreds of millions and, more likely, billions. Netflix simply does not have enough cash on hand, and it won’t generate enough cash flow from its current business, to afford the content it needs to stay competitive.


Stay competitive with whom, you might ask? Try Apple (AAPL) and Amazon (AMZN). And how long do you think it’ll be before Google (GOOG) gets involved in streaming content? Amazon has $6.3 billion in cash and $1.8 billion in trailing 12-month free cash flow. Google has $34 billion in cash and $6.9 billion TTM FCF. Apple has $28 billion in cash and $29 billion in TTM FCF.

And Netflix has $350 million in cash and $270 million TTM FCF.


Which company do you think is the odd man out?


Even if Netflix could compete, which company do you think will have the best streaming technology? Best advertising? Best pricing? If this is starting to sound like a commoditized business, it’s because it eventually will lead to just that, which also will squeeze margins. Netflix won’t even be around by then.


So, yes, I am not only saying Netflix is a "short," but it is a guaranteed zero in my humble opinion. It won’t happen right away, but it will happen. And there are other things that simply aren’t helping its case.

Netflix’s entire disclosure process is not transparent. Whereas 99% of public companies release earnings, then hold conference calls and open the field to questions from analysts, Netflix insists on having questions in advance. It doesn’t disclose exactly how much its streaming content deals are for — the media just takes guesses, and one must look at off-balance sheet obligations to divine exact amounts. And when you look at those numbers, you realize Netflix has to come up with an awful lot of cash each and every year going forward to hold onto those deals.


Netflix is a goner. The only question is whether you want to wait for NFLX to tick back up a bit and then short, or short it now.


As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. He recently closed out a short position in NFLX at $115, having shorted it at $252 and $210.


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127Comments
Nov 4, 2011 2:36PM
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Until TVs and Video players (DVD, BR-DVD) are more commonly internet connected and come equipped with harddrives, physical media isn't going anywhere.  I have very few friends that have their PCs connected to their TV, or their TV connected to the internet.  And I have a lot of buddies that are film buffs.

 

DVDs and CDs make a poor comparison.  Typically you only want a few songs from an album, where you want all of the content on a DVD, which makes buying individual songs attractive over an entire album, not to mention the portable nature of music.

 

The author really didn't think this article through, but then again the internet has dragged down journalistic quality.

 

Nov 7, 2011 1:37PM
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Why does every journalist assume that everyone has the ability to stream movies?  A good portion of the country is not connected to cable and depends on DVD's from an outlet source or even the library.

Many intelligent people are making a choice to not spend their life and money on the next big electronic device.....they want to live in the real world, not a virtual world.

Nov 7, 2011 1:07PM
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I have always been a collector of video media. I collected VHS tapes, then laser discs(300 titles), now DVDs(100+).  Of all of them, I like the DVDs the best. I like the fact that I physically own them. Using streaming video to me is transient. If I want to watch it more than once, I need to store it on a computer or pay for it again to watch it. I have classic movies in my collection. and some of them are no longer available anywhere.  So what do I do when I want to watch the National Air and Space museum photo archive? This is a archive of close to 300,000 still photos in 3 volumes. I'm sure Amazon does not have that ready for viewing. So now all of the Geeks in stream land are trying to steer everybody to their way of thinking. Sorry, I'm not buying. I want hard copies!!!! 
Nov 7, 2011 10:11AM
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I do not agree with the statement that DVD's will be gone in the next 5 years or possibly 3 years. Streaming entire movies have way too many down sides to be a competetive market in that time frame.

 

For one you have the millions of people with absolutley no internet service at all. There are articles every day about Comcast and others loosing customers due to the economy. I bet all those people that dropped cable still have the DVD players around.

 

Second those that do have cable do not always have fast enough service to watch a whole movie without buffering delays. Add to that I imagine very few have the correct gaming console or TV / Computer link up to watch on a screen big enough to really enjoy a movie. I personally enjoy a weekly family movie night where we all sit around and watch a good Netflix provided movie. Why cram around a 20 or 25 inch monitor when we can watch it on the big screen without delays.

Nov 4, 2011 2:56PM
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Not everyone wants to spend $59.99 a month for broadband or lives in an area where it is even available. Besides, I've seen plenty of streaming videos and it absolutely does not compare to a Blu-Ray playing on a high quality 1080P TV. Furthermore, flat screen and Blu-Ray technology isn't even being used to it's highest possible level of quality at this time but internet bandwidth is being stretched very thin in some areas.
Nov 4, 2011 3:32PM
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I guess the author of this article has never been out of the city and doesn’t know that more than 1/3 of the people in the US do not have broad band available to them.

 

DVD’s will be around a long time. Blue Ray may replace DVD’s in the majority of sales within the next few years but I would bet you that DVD’s will be sold for at least 10 more years.

 

 

As for streaming services he needs to think again, Netflix will pick up more customers when all of this shakes out. People want streaming but they do not want pay per view.

 

Pay per listen works in the music world but it wont work in the movie world because no one wants to pay $3.99 every time they sit down to watch a movie. Yes Apple, Amazon, Microsoft and Google offer or will offer a streaming service but their business models are based on pay per view. Do your self a favor and contact the leading cable and satellite providers and ask them how much pay per view is as a percentage of their overall business. I bet you will find that it is a lot smaller than you think People do not want to think about their bank account every time they sit down to watch a movie with a bag of popcorn in their lap. That is why Netflix has done so well so far.

Nov 7, 2011 8:50AM
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I still use a VCR to watch videotapes I bought or recorded in the 1980s.  I didn't switch to DVD until 2006.  DVD gone in 3 to 5 years?   What are you smoking, Lawrence Meyers?  The DVD format itself might eventually disappear, but there will always be consumers who want to maintain a physical home library of films, regardless of the technology.
Nov 7, 2011 1:02PM
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Mr. Meyer what in your professional opinion is a better choice than NETFLIX since they are on the way out?  They are not perfect but they are the best economic and product choice for both streaming and DVD.  All the other choices either do not have the content or they are too expensive.  I pay only $47 per month for internet and NETFLIX.  I am saving about $130 per month.  Can you tell me a better price choice than that?  Hang in there NETFLIX!!!   This customer appreciates what you are doing and I understand that there are a lot of haters out there banking on your failure.

 

Nov 4, 2011 4:08PM
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Often overlooked is the fact that many rural areas do not have affordable Internet access and if they do, it is with limited bandwidth not suitable for streaming video.  This is why DVDs/Blu-Ray will not disappear as quickly as mainstream media predicts...
Nov 7, 2011 10:56AM
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According to this logic, eBay, Amazon and Facebook do not exist. You can't make a statement like "Netflix is a goner" while the company is still solvent without a major risk of looking like a jackass. There is no real logic behind the assumption outside of "they're doing much worse than a year ago, ergo there is no way they can survive". Netflix continues to add new content, and I continue to be a very satisfied customer. I may occasionally rent from Redbox or our local Family Video, but the majority of my non-live content viewing is through Netflix. I have Amazon Prime as well, and can say that there is nowhere near the variety or quality of content as Netflix, and Netflix's pricing is still more competitive than any real alternative I have seen.

You can say they've taken a hit, but I seriously doubt that they're down for the count yet.

Nov 4, 2011 3:05PM
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I for one am going to be royally pissed if the powers that be kill Netflix.  I have been a customer for about a year, and if there is a better entertainment bargain out there, I've yet to see it.  Yes, even with the (oh horrors, a 60% ) price increase.  If I turn the discs around in one day, I can get two a week, while filling in the rest of my considerable viewing time with streamed content.  And everything comes without commercials. 

Netflix has earned my loyalty with good service and excellent content choices.  LONG LIVE NETFLIX !!!

Nov 4, 2011 6:17PM
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We like Netflix.

Remember, MSN owns a big chunk of blockbuster. Surely you have noticed alot of these hit job articles on Netflix.

So where is apple, google, and amazon if it is so easy to do what netflix does?

We have amazon prime. It isn't near as good as netflix.

As for dvd's, they will be around for ten more years. Blu ray players still play them. DVD players were never backwards compatible with videotapes.

Oh, and 16 years ago apple was nearly bankrupt. There are no sure things in the world.

 

Nov 4, 2011 8:42PM
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Netflix ain't going nowhere. They started it just like Apple ain't going nowhere with smart phones or tablets. People try to hate because they feel ripped off, when really they were getting a helluva deal, and now it's really still a helluva deal, but some people are babies, and me struggling to make ends meet, I still subscribe to streaming and 1 dvd out at a time w/blu-ray, which is about $20, and is tough to beat for the content they offer. The only reason they raised the price was so they could license more content for it's customers, because apparently it is expensive. On top of that Netflix does one thing, and that's get you movies and TV Shows, and if they have the right people employed they will continue to do that for years to come. I am tired of all the greedy conglomerates dipping their fingers into the next man's honey. It needs to stop, and it starts with consumer loyalty. Google does search engines, and that's what I use them for, and that's all. Microsoft does software, and that's what I use from them. Apple does quite a few things, and I use the things they started doing. As far as Blockbuster, they always overcharged IMHO, and it was great to see netflix come along, as well as gamefly. I urge the average consumer to at least consider going with the people who started whatever they are doing, unless they are really doing it that bad, which Netflix is not. You can stream Netflix on almost everything from your computer to your smart phone to your blu-ray player to your XBOX 360, it's fantastic!

 

 

Nov 7, 2011 12:23PM
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Those other companies only offer streaming videos by paying each movie to watch. While Netflix offers unlimited video streaming for a monthly service. I'm staying with Netflix until the end.
Nov 4, 2011 3:23PM
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I agree that the demise of the DVD is coming but I think it will be around for quite some time. I would even venture to say that “Streaming” won’t be around very long if the opponents of “Net Neutrality” have their way. If “Net Neutrality” dies on the vine what is to stop Internet providers from throttling your bandwidth to make you pay more for streaming a movie, especially a HD streaming session?

The other issue I see with predicting an early demise of the physical DVD now is that of the 60% of US households that have Internet access only 57% of those have a connection speed of 2Mbps or higher (State of the Internet study by Akamai 2010). That means there is still a huge amount of households that have internet connections where streaming of video is a pain in the rear end due to the large amount of buffering that takes place. Nothing worse than streaming a movie and having to wait until your buffer catches up, worse when streaming HD content. And then what of the 40% of households that don’t have internet connectivity? I would venture to say with over 133 million DVD players sold in this country many of those remaining 40% of households without internet connectivity own one or more DVD players. I don’t know how many households that 40% translates into but I wouldn’t surprised if it is a huge number of folks.

Nov 4, 2011 8:42PM
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To say that DVD's will be gone in 3-5 years is just wrong. Streaming is a great thing but still lags behind DVD's in quality and quantity. I had Netflix for a couple years with streaming and 2 DVD's at a time. You cannot get new releases on the streaming service. So I ordered them on DVD. I watched lots of TV episodes and older movies with the streaming.

 

Even if a newer movie comes out in the streaming library chances are its not in 1080p HD, and probably not in 5.1 or 7.1 Dolby audio. I am a home theather buff and Iove my custom system and 50 inch 3d plasma tv. Unless streaming services like Netflix start streaming in 3d 1080p with 7.1 audio, I will be forced to order Blu-ray's from Netflix.

 

This article is not very good at all. Netflix is the only provider of unlimited instant streaming for one low monthly price. All the others put a price on each movie watched, which is no different than PPV that has been around for ages. Netflix is in a whole other category when it comes to instant streaming.

 

I feel that DVD/BluRay's will continue to thrive well past 5 years from now, simply because you cannot get the selection or quality demanded by some customers from instant streaming.

Nov 7, 2011 12:51PM
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This is to bad. I really love Netflix. Unlike like the rest of the world I didn't mind a price increase, $22.00 a month for streaming and 2 dvds a week. is a very good price. And of course royalties have to be paid to those who think they should make even more millions off the backs of little people who can't afford to go out every night of the week. Life's little pleasures cost the most.  Good luck Netflix, I'll be with you to the end if I have to.
Nov 4, 2011 6:25PM
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My  husband and I have been customers of Netflix for some time now and are very happy with them.  I would hate to see them go under.
Nov 6, 2011 11:06PM
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He forgets about many +50 year olds that don't know how to stream. DVDs will last a while.
Nov 7, 2011 1:27PM
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Exactly how is amazon or google or apple even in the game at this time?

 

They rent individual movies and have individual movies for sale.

 

Netflix has a setup to watch as many movies as I want whenever I want.

 

It's apples and oranges unless the other company's are gonna change there business model which I'm unaware of.  Will there be another company that adapts a simular business model?  Possibly but not at the moment.

 

Also to say dvd's and bluerays are goin the way of the doodoo is a bit premature in my opinion.  I do rent a movie online from time to time but theres noway in hell I'm ever gonna purchase one.  Not when I dont know if that company is gonna go out of business and take my movie collection with them and when they are charging the same price for an online movie without the extra features, I have to have an internet connection to watch it,and I cant let someone else borrow the movie. OH and it costs just as much.  I have no idea why people buy the online version seems a bit crazy to me.  Rent sure, buy?  why?

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