Is Netflix, Inc. (NFLX) Overpriced?

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Netflix, Inc. (NASDAQ:NFLX)‘s stock price has taken investors on a wild ride over the last few years. After beginning calendar year 2010 in the low $50s per share, the stock zoomed upward to a high just under $300 before crashing to $70 at the end of 2011. However, the stock has since risen to above $200, causing skepticism among investors that the company is actually worth what the market is willing to pay for it.

Netflix, Inc. (NASDAQ:NFLX)

Netflix (NASDAQ:NFLX)’s stock price volatility is indicative of the company’s operating performance; there have been some missteps and some scares, but the company’s outlook is generally perceived to be bright. However, investors would be wise to examine what could go wrong before buying the stock at 50 times its highest level of earnings (achieved in 2011).

Cool business

Netflix, Inc. (NASDAQ:NFLX) has benefited from consumers’ increasing taste for viewing content online rather than on a television set. The company has also reaped a windfall for being the first major company to stream content; its large subscriber base — and knowledge of its customers’ likes and dislikes — gives it a tremendous advantage over the competition.

For instance, its hit original series, House of Cards, was created using customer data to determine which formula would most interest its viewers. Nobody else in the business has a database with this information.

In addition, Netflix, Inc. (NASDAQ:NFLX) recently penned a deal with Dreamworks Animation Skg Inc (NASDAQ:DWA) that gives it exclusive access to more than 300 hours of original shorter-form television content from the legendary animation studio. Although the economics of the deal are not publicly available, the deal gives Netflix an important children’s content source that competitors do not have.

But the deal could be just as good for Dreamworks Animation Skg Inc (NASDAQ:DWA). Television programming is less risky than movie production, and Dreamworks gains a more reliable source of cash flow to even out big bets on movies that usually turn out to be either blockbusters or flops. It also expands its merchandising opportunities because it can create more shorter-form content than blockbuster movies.

Having previously inked a deal with Netflix, Inc. (NASDAQ:NFLX) to distribute its film library, the original content deal appears to solidify a long-term commitment between Dreamworks and Netflix. This could work out to the benefit of both companies.

Internet levels the playing field

Perhaps the most difficult task in business is building a durable competitive advantage in an Internet-based business. Netflix has a head start on the competition, but its deep content library may not be enough to fend off the likes of, Inc. (NASDAQ:AMZN) and other competitors.

Although Netflix, Inc. (NASDAQ:NFLX)’s library is arguable more robust, Amazon’s entry into the market has raised the cost of content acquisition; Netflix may still be signing new content deals, but Amazon is bidding up the price.

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