Thursday, September 6, 2012

Buy Netflix Stock?

During the last few months, I've mentioned the marked decline in the service provided by Netflix. Apparently, I'm not the only one to notice. Netflix shares have toppled in the last year, from a high of $221 to a current $55. So as an investor, is Netflix a good buy? Simple answer: No.

One of Netflix's biggest problems is licensing costs. Licensing costs have gone through the roof; and as a result, Netflix has not renewed licensing agreements with a number of companies, including Starz, the pay-TV cable service that supplied Netflix with films from Disney and Sony Pictures. I'm afraid they simply don't have enough bargaining leverage. There's no denying that films on Netflix's streaming service aren't as fresh as in the past. 

Moreover, Netflix's DVD rental operation is definitely suffering. Movies take longer to get or are unavailable. In a letter to shareholders in July, Netflix spent its entire opening summary touting its streaming business. There was no mention of its DVD business. Netflix seemed to act as though its rental division didn't exist, and that's telling.

Netflix is treating its DVD business with disdain, which isn't all that new. Last year, when the company was in the midst of widespread user outcry over its 60 percent price rise, Netflix announced that it would spin off its disc-rental operation. Soon after, Netflix was forced to ditch that plan and stick with its DVD operation.  

Just a few days ago, Amazon upped its competition against Netflix by signing a multi-year licensing deal with cable channel Epix, bringing a lot of popular films (Hunger Games, Iron Man 2) to Amazon's fledgling movie streaming service. Netflix recently ended its exclusive deal with Epix, and it's unclear whether it will renew the deal later this year. As more and more companies compete with Netflix, I wonder if it will remain the number one provider of on-demand Internet streaming media and DVD-by-mail. It won't if its service continues downward.

In fact, in the last few months, I've rediscovered our public library. It offers many movies that I like for free. 

Stock Tip: Stay away from Netflix shares. I recommend a hold or even a sell.

Disclaimer:  I do not own any Netflix shares. 

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