February 11, 2011 –
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RELATED TICKERS: NFLX
I finally went ahead and unloaded my Netflix (NFLX) shares this morning at $227. I do still think there is additional upside even at today's prices, but I got in fairly early on this train ride and decided to take the profits while I could.
Netflix has built a decent-sized moat through its brand name, distribution network, and nearly-ubiquitous positive customer experience. However, it is fairly obvious that there is a transition from the DVD-by-mail business model to one of online-streaming. NFLX is smart enough to see this coming, and they are already adapting their business model to it (1/3 of customers are currently paying $8/month for "streaming only").
Ultimately though, I think the market is pricing this stock for perfection. The competitors are coming. There are rumors that Amazon is going to offer a free online streaming option for customers who subscribe to their Amazon Prime service (at ~$80/year). AAPL also isn't far off on fine-tuning Apple TV and their offerings of movies through iTunes.
What all the incoming competition ultimately means is that the price of content will likely go up. When I say content, I refer to the networks that own the rights to the movies/TV shows that Netflix has exclusively available. NFLX has to pay royalties on every time that someone watches them (I've read that this is approximately $0.40 per viewing/rental).
Thus far, it has made lots of sense to lock-in exclusively with Netflix - they've been the only big game in town! But, as more options start knocking on the network's door, NFLX is either going to:
1) lose long-term contracts;
2) have to pay more for the content they're using; or
3) lose customers to competing services.
Any one of those spells bad news for a stock that is today selling for 77 times earnings. [more]
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