The kicker, for me, is this: To get back to a P/E of 30, which is where it was in early 2012, Netflix would need to earn $330 million this year while its stock goes nowhere. Netflix’s purportedly “strong” earnings report that just came out shows a net income of $7.9 million for the fourth quarter. Annualized out, that’s less than a tenth of what’s necessary. If Netflix grows its revenue another 13% this year, as it did in 2012, and its net margin rebounds to 2011 levels, it still only manages to net $283 million. With no forward guidance to parse, we can only assume that Netflix’s leadership doesn’t expect to hit such targets, either.
I want to like Netflix. Six months ago, I would have suggested buying it. However, when even a highly optimistic scenario doesn’t come close to returning Netflix to reasonably priced territory, I have to consider it overvalued and will make my call accordingly. This one gets an underperform call from me. Let’s revisit this after the market comes to its senses.
Travis’ take
Let’s start with the good news. Netflix is attracting new customers like crazy, adding 5.48 million subscribers during the year. Margins are also improving in both the domestic streaming and DVD business, which allowed Netflix to be (slightly) profitable over the past three quarters.
The bad news is that none of that allowed Netflix to build a substantial or sustainable profit. Revenue keeps going up, but so does the cost of content, as Alex pointed out, a problem that will only get worse once the Disney deal kicks into high gear.
Netflix may be able to offset some of this additional cost by raising prices on consumers, but Netflix customers have already proved to be a fickle bunch. When Netflix went through its Qwikster debacle, it quickly lost 2.5 million subscribers, proving that Netflix doesn’t have inelastic demand. Customers are free to come and go as they please and have no problem doing so. But margins, content costs, and customers aren’t the reason I’m seriously worried about Netflix.
Here’s the most telling question I can ask about Netflix: What does Netflix do that Disney or HBO can’t do themselves?
The answer is easy — nothing. Both ESPN and HBO have two of the best streaming apps available. Disney is working on a service called Disney Movies Anywhere, which still has plenty of content to offer consumers despite the Netflix deal. Network television stations all have streaming apps in some form, so is what Netflix does novel in any way? Netflix has shown the way, but it doesn’t bring any sort of long-term competitive advantage to the table. It doesn’t provide the wire to our house like cable does or the dish on our roof like current cable providers do. If any content provider wants to leave (see Starz), it can build its own app and offer its content to consumers with any number of revenue streams.
