Netflix Inc. (NASDAQ: NFLX) CEO Reed Hastings has a plan to keep the company relevant given that the DVD-by mail business will become obsolete sooner or later as video content delivery via the internet becomes more widespread.
The company is partnering with LG Electronics to develop a set-top box that will allow you to stream movies from the internet straight to your television -- look for it in the second half of this year.
It's an exciting development and strong evidence that Hastings realizes that company's current bread and butter, mailing people movies, isn't the future. But I'm skeptical about whether Netflix shareholders will reap the rewards. The problem is that I can't figure out what Netflix's competitive advantage is in entering a new space. Sure, it can invest in new technology -- but so can everyone else and a lot of other companies are. Just as Blockbuster's (NYSE: BBI) brick-and-mortar presence didn't mean they could make money doing DVDs by mail, I don't think Netflix will be any better positioned than a lot of other well-funded companies looking to be on the cutting edge of the next generation of movie delivery.
True -- the company has a strong library of titles already available for streaming, but other companies willing to spend the money probably will be able to duplicate that.
Netflix currently trades at more than 25 times earnings and 4 times its book value -- for a company that will have to reinvent itself to stay relevant.
Maybe Mr. Hastings can do it. In an interview with the Wall Street Journal, he sounded a confident note. But he still sells stock quite frequently. I think investors should be careful about paying a pretty high multiple for a company in the process of reinvention, a process that hasn't worked for most companies in the past.
I still think Jim Chanos nailed it when he put it this way: "Consider the concept of having little old ladies in warehouses stuffing envelopes with DVDs. That might be a business for the next two or three years, but then it won't work. Why anyone would pay twenty-seven times earnings for that is beyond me."
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Reader Comments (Page 1 of 1)
2-11-2008 @ 12:19PM
Enrique said...
I think that Netflix is the best thing since sliced bread. the only thing that they are lacking is variety. They are limited to only current movies with a few nostalgic titles. I had a greeat time this Christmas by renting the few nostalgic DVD's they had. Everyone loved it. All they need to do is expand thier collection and market it better. Most people who have Net flix love that type of service. Their convenience is fantastic and the processing speed can't be beat.