What Is Netflix, Inc. (NFLX) Hiding And Why?

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Netflix stands alone

It’s more than interesting to note that Coinstar, Inc. (NASDAQ:CSTR), one of Netflix’s rivals, perfectly understands that expenses for the purchase of a DVD library should be recorded in the operating section. In its most recent quarterly report, Coinstar reported the expenses of its DVD library under ‘Cash flow from operating activities,’ just as they should be recorded. Perhaps this explains why the darling of the video-rental world trades at an insane P/E of 570x and P/B of 2.6x, while Coinstar, its modest rival, trades at a P/E of 10 and P/B of 0.7. At these prices, Coinstar is well inside the value zone. The difference is even more striking when you consider the fact that Netflix’s profit margin is a paltry 0.5%, while Coinstar shines with a profit margin of 8%.

Another much smaller competitor in the video-rental industry is Hulu. A combined creation of NBC Universal, News Corp (NASDAQ:NWS), and Providence Equity Partners, Hulu offers video rentals and streaming TV. In fact, Hulu is so dominant in its field that it accounted for 43% of total streams in 2012. The thing about Hulu is that it’s a private venture, and therefore is not obligated to publicly disclose its annual reports. Hence, we have no way of knowing for sure how it classifies its video library content.

So, what’s an investor to do?

Avoid holding the shares of a company that is suspected of using dubious accounting tricks. Sooner rather than later, accounting games tend to catch up with the company that employs them. Unfortunately, it is usually the unsuspecting shareholders that get hit first.

The article What Is Netflix Hiding And Why? originally appeared on Fool.com and is written by Shmulik Karpf.

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