Netflix, Inc. (NASDAQ:NFLX) announced earnings yesterday that painted a very bleak picture for the company. The company saw earnings drop by 88% for 3Q on greater than expected international expansion costs, causing the stock to drop by over 15% in after market trading. Netflix’s net income came in at $7.7 million, compared to $62.5 million for the same quarter last year—see which hedge funds were killed by Netflix. The company did manage to grow international subscribers at a greater rate than expected, but spent way more money than expected to do so.
Key concerns noted by Netflix CEO, Reid Hastings, was that despite the company’s over 1 million subscribers in Latin America, it will take longer than expected to reach profitability in the country. As well, the company is now likely to carry a loss through the fourth quarter given its recent launch in Denmark, Norway, Finland and Sweden.
Netflix managed to continue to adding subscribers in 3Q, up 2 million to a total of 29 million subscribers, but a transition in consumer preference has allowed notable competitor Redbox to take market share for movies and films, as Netflix sees the majority of its viewers now preferring television shows. However, even as competition and cost concerns slam Netflix the company still trades above its closest competitors on a valuation basis.
Notable competitor, Coinstar, Inc. (NASDAQ:CSTR), is best known for its self-service movie rental kiosks, Redbox. Coinstar’s initiatives include the potential to place self-serve kiosks for photo printing and coffee. The company is said to have been in talks with private-equity firms to take the company private, but stock is now down 3% year to date, versus having been up as much as 50% earlier this year.
However, Coinstar has beat earnings for the past four quarters and is expected to grow earnings at over 18% annually over the next five years. These are impressive growth prospects that both Jim Simons and Ken Griffin believe in, as they upped their 1Q stake during 2Q by 70% and 290%, respectively.
DISH Network Corp. (NASDAQ:DISH) is expected to add over 100,000 net subscribers for both 2012 and 2013. The company is expected to see a rise in its average revenue per user based whole-home DVR services, streaming video and TV Everywhere—DISH’s streaming feature. It remains to be seem how much its streaming service will catch on, but its an interesting prospect nonetheless. Additionally, the company recently reached a settlement that will bring AMC back to DISH subscribers—the company has been up as much as 5% this week on the news. Earlier this month the company launched a satellite broadband offering that targets some 14.5 million rural U.S. residents that previously had no Internet available. Fund interest was positive for DISH in 2Q, with George Soros and Jim Simons upping their 1Q stakes 115% and 72%, respectively, yet insiders were selling over the past month in the range of $33 to $35.70.
It is rumored that Time Warner Cable Inc (NYSE:TWC) and HBO will offer viewing services directly to consumers, versus being a pay-cable business. The company has been growing its core business, expecting revenues up 6.1% in 2012 and 4.7% in 2013 on the back of bundled high-speed data and voice penetration. Time Warner pays a 2.3% dividend and has seen a number of EPS revisions upwards over the last month, where earnings are now expected to grow 25% and 22% for 2012 and 2013, respectively.
Let us not forget the ever-popular e-commerce company that appears to be competing with various players across several industries, Amazon.com Inc. (NASDAQ:AMZN). Amazon’s Instant Video offering takes a direct stab at Netflix. 2013 $2.75 EPS estimates put earnings at a huge increase from the expected $1.01 EPS for 2012.
While Amazon trades at a forward ratio of 90x, Netflix still manages to trade at a forward ratio of 67x. We believe that the growth prospects are much greater for Amazon, with the company getting into web services, hardware and digital content, which will help Amazon grow into its valuation. Additionally, by leveraging its leading Internet brand name to offer online video, the company can further expand its margins.
As Netflix’s DVD customers continue to decline, streaming growth will be left to mitigate churn. Netflix will be relying on its ability to enter global markets to spur future growth, but uncertainty around adoption and costs provide a cloudy outlook for the company. We believe that increasing content cost and a flood of competition into the Internet video streaming still poses key risks for Netflix.
While Amazon is a P/E ratio outlier, the other movie and TV providers trade with an average P/E of 14x. Even with Netflix’s recent stock slide, it still trades at over 30x. We would prefer to avoid Netflix for the time being given the rich amount of competition and uncertainty with international expansion. We do like Amazon’s prospects to grow market share in the streaming industry given its strong brand name, and would be even more interested should Amazon decide to take a look at buying competitors like Hulu.