Netflix, Inc. (NASDAQ:NFLX) is seeing competition for its online streaming business model, from age-old players in the TV/movie industry to e-commerce companies. This competition, and overestimation of growth, has sent Netflix’s stock tumbling from over $300 to around $55 in a little over a year.
Netflix’s 2Q results came in close to expectations, but 3Q guidance was lower than expected. Netflix did add 530,000 net domestic streaming subscribers in the second quarter – near estimates – with expectations for 3Q being between 960,000 to 1.76 million added subscribers. As Netflix looks to add more subscribers, they plan to sacrifice profitability in order to expand their operations.
Some of Netflix’s biggest competitors come from a mix of industries. Two being Coinstar, Inc. (NASDAQ:CSTR) and Amazon.com, Inc. (NASDAQ:AMZN). Coinstar operates the fast growing Redbox businesses and is expected to grow earnings 35% this year. Coinstar trades at a trailing P/E of 9 and a forward P/E of 8, and its PEG ratio comes in at 0.5.
Netflix is seeing some of the more direct competition from Amazon, who recently announced an agreement with EPIX for a multi-year licensing agreement, which is a direct stab at Netflix’s streaming business. As well, Amazon has its Kindle device, which it can offer streaming services to. While Amazon trades at a trailing P/E of over 300 and a forward P/E of over 100, its P/S ratio is only 2.1, compared to Netflix’s 1.0. Amazon is expected to grow next year’s earnings over 200%.
Two of the competitors that Netflix has taken market share from are Time Warner Inc. (NYSE:TWX) and DISH Network Corp. (NASDAQ:DISH). Both of these companies are currently creating new initiatives to revive their business models. Time Warner trades at a premium to DISH – who lost 166,000 subscribers in 2011 – on a multiples basis. Time Warner has a P/E of 18 and P/S of 1.5, where as DISH has a P/E of 12 and a P/S of 1.0. Time Warner appears to have higher growth prospects with diffusion into international markets, as well as revenue from high-margin streaming deals with the likes of Netflix and Amazon.
Despite the concerns for Netflix, there are a number of funds we track that continue to look to the stock as a good value play and growth opportunity. John Griffin of Blue Ridge Capital owns the most shares of any of the funds we track, at 2.5 million at the end of 2Q. This represents 2.6% of Blue Ridge’s portfolio and 4.5% of Netflix’s outstanding shares.
Of the funds we track, nine took new positions in Netflix, while nine others increased their 1Q positions. Stephen Mandel of Lone Pole Capital and George Soros were two top funds initiating new positions, while Jana Partners and Citadel Investment Group upped their positions, 101% and 429%, respectively.
The last time Netflix saw a dip, during 4Q 2011, when the company’s stock price fell to $65 before rebounding to $125, John Griffin increased his stake 17%. Also during this quarter, Israel Englander upped his stake 400% and Tiger Consumer Management increased theirs by 43%. New additions to Netflix shareholders were Whitney Tilson with T2 Partners, Jana Partners, and Steadfast Capital Management. After its selloff, Netflix began to rebound in early 2012, but started another material decline during the second quarter of this year.
The valuation metrics of Netflix seem to suggest that it is really anyone’s guess where the stock will end up. Currently trading around $55 a share, the stock has been as low as around $50 and as high as $130 year to date. The estimates put this year’s EPS down 100% from 2011, but analysts also expect that EPS will be up over 9,000% from 2012 to 2013. The company’s trailing P/E ratio is around 32, but it trades at a forward P/E of 62, and its PEG ratio comes in at 362.
We believe the funds loading up on Netflix during the second quarter think the stock is oversold, with international expansion still posing growth opportunities for the company. It should be noted that Amazon’s aggressive move into the streaming space may already be factored into its stock price, making Netflix the safer play at the moment. For a complete look at the hedge fund industry’s sentiment toward this stock, continue reading here.