- Netflix sees no value add from entering the devices business.
- It has ruled out sports streaming, which has potentially huge demand.
- At $417.8 a share, Netflix is expensive at its current valuations.
Netflix (NASDAQ:NFLX) the Internet television network company is sticking to its core business. In a recent Q&A session at the Recode technology conference in Palos Verdes, Calif., Reed Hastings (CEO) said that his subscription-streaming-video company has no interest in making a device, and it doesn't have the time, energy or money to buy the rights to live sports content.
The above though has not been factored in its market numbers and trades; in the entire month of May 2014 the stock has had only 4 down days. The stock currently trades at 102 times its 2014 guidance/estimated earnings and 61 times its projected earnings for 2015. The current run may be a result of its deal with Disney and its market share, but many analysts and market movers are of the opinion that the stock is over-bought; that the current momentum is not sustainable and the stock will not touch past levels. The market expectation is that the stock will be range bound between $424 - $458, with resistance at $458
The above holds unless Netflix expands internationally into further new markets. Last week the company announced expansion into Germany, Austria, Switzerland, France, Belgium and Luxembourg later this year. Emerging markets including the BRIC nations is uncharted waters for the company.
Netflix revenue stream is predominantly based in the domestic US market (88%). Users in this market prefer a mix of content and hardware capabilities as is evident from Amazon’s launch of Kindle Fire TV earlier this year. The e-commerce giant competes with Netflix with its Prime Instant Video streaming service. The streaming device market is pretty competitive at the moment with players like Roku, Hulu, Google’s Chromecast, Apple TV, and Amazon’s Kindle Fire TV amongst others. The decision to stay out of the streaming devices business is actually not a downer for the company, as it’s not a value add to the business currently as Hastings noted, "We're working with over 1,000 devices now," he said. "There's no value-add for us to do a device."
The decision not to get into live sports content on the other hand may be seen by many as a downer, as this is a demand from very regular Netflix users. Google’s Chromecast recently tied up with BT Sport for such live streaming. This could be a potential revenue stream for the company as well.
After soaring 60% annually over the past five years, Netflix shares are now priced for perfection. Yet there are plenty of challenges ahead. As usage has grown, for instance, the speed at which Netflix content flows to Comcast (NASDAQ:CMCSA) (Fortune 500) and Verizon (NYSE:VZ) (Fortune 500) customers has been slowing lately. To address this problem, Netflix recently agreed to pay Comcast and Verizon to stream Netflix's content more quickly. The deals, though, gives Internet service providers leverage to assess more such "tolls" down the road.
A look at Netflix 3 year return in comparison with some of its competitors (Comcast and Time Warner) and the S&P 500 throws some interesting insights.
In the past one month Netflix has outperformed its competition, also the case in 1-year returns. The returns in 3 years and beyond depict a different story. The company’s stock has mimed the S&P index offering similar returns whereas the competition has offered superior return over the past 3 years and beyond.
The company’s price earnings to growth ratio (PEG ratio) is currently 2.56 in comparison to Comcast’s PEG ratio of 1.56, which indicates a reasonably priced valuation for the stock in comparison to Netflix.
Currently Netflix’s competition is not from players utilizing its services (such as Google and Apple’s Netflix Ipad app) but from players like Amazon. The fact that needs to be highlighted here is that the competition offers entertainment streaming along with hardware and bouquet of other services, whereas Netflix is a pure play content streaming company. The general tendency of customers is to favor a bouquet of services rather than pure play streaming. Hence, not getting into devices may result in the company shutting out other potential revenue streams and growth in the long run.
To see Netflix’s current stock price, please click here: (NASDAQ:NFLX)