Netflix (NASDAQ: NFLX) released its third quarter results yesterday, and things looked pretty good: net income up 30%, revenue up 16%, subscriber-acquisition costs down 15%, and the rate of subscriber cancellations remained flat.But the company cut its revenue forecast, and net subscriber additions are down 30% so far for October compared to last year. CEO Reed Hasting said (subscription required) that "Since July, conditions have deteriorated markedly. It now appears that there will be continued growth for Netflix, but not as fast as last year." He added that "The state of the economy could explain this modest headwind."
I'm not so sure. Given that watching DVDs at home is a lot less expensive than many other forms of entertainment, it should be somewhat immune to economic woes. In an economy as weak as this one, any struggling company will be quick to blame its woes on the economy. Sometimes that's the case but, often, there are more serious issues that won't be solved by a macroeconomic upturn.
In the long run, it's hard to see what gets investors so excited about Netflix. The growth appears to be slowing, even with a price/earnings ratio of 20 -- which is pretty high in this market.
Then there's the problem of the long-term outlook for the company's business model: any slowdown in growth should be viewed with great caution by investors. As Jim Chanos described Netflix: "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."
Maybe Mr. Hastings can reinvent the company for long-term prosperity -- they're certainly investing aggressively in online delivery of movies -- but they're still vulnerable to a wave of competitors in that new field. And there's a distinct possibility that one day Netflix will be just as irrelevant as Blockbuster (NYSE: BBI).
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Reader Comments (Page 1 of 1)
10-21-2008 @ 3:43PM
beachpaul said...
The Red Box vending machine is the best way to deliver the the top 50, 100, whatever, at $1 a pop. Streaming is the future. They have to figure a way to sell the oldies. The music biz were masters of it.Snail mail recedes each passing year has a cost effective way of distributing entertainment.
10-21-2008 @ 4:02PM
Trace said...
We cut off our Netflix subscription for reasons totally unrelated to the current economy. We find it easier to use a service like Redbox to rent movies. Redbox has a vending machine approach to movie rental. It offers a great value ($1 per night rentals) and convenience that convinced us to turn off our Netflix subscription.
10-21-2008 @ 4:26PM
adam said...
Netflix > Redbox if you watch a decent number of movies. With redbox you are paying for the time you have the disk, netflix is a fixed cost per month.
Then of course theres the huge catalog of titles that netflix stocks. Redbox doesn't have the space to stock a large selection of indie, foreign, or older films.
10-22-2008 @ 8:00AM
Virgil Bierschwale said...
Actually I believe the CEO is correct.
I recently had to cut out net flix and directv and this article I wrote a while back explains it..
Folks, it's happening to more and more of us and we need to bring our jobs home
article follows ====
I've tried everything I can think of to get this information in front of the media with no luck.
I sometimes believe they are ignoring me because they feel that they know what is best for us as a country.
I always feel that they can't see the forest for the tree's.
So, I will try again.
They say this financial crisis is a global crisis, but that is not true.
Yes, ALL of the countries that have been sending their work offshore are hurting.
But if you will look around, you will find that the oil producing nations are not hurting.
Why is this ?
Lets take for instance a figure that says the majority of our country makes 52,000 per year as that is a easy number to work with.
That is a nice round number of 1,000 per week.
Then lets figure that their tax's are 25 % or 250 per week.
So now they have 750 per week disposable income.
Now lets assume that they use one tank of gas per week with an average price of 60 bucks per fillup.
That leaves them with 690 left over to pay bills..
Oops, they have two automobiles.
So that leaves them with 630 left over to pay bills.
Electricity is probably costing them about 350 per month and a phone and a second line and dsl is probably another 100, so we're talking 450 per month.
Now we need to add in 100 per month if they use propane or natural gas, so we're up to 550 per month in utilities.
550 * 12 = 126.92 per week in utilities, so lets make that 130 so we can keep the numbers easy to figure.
Oops, they're down to 500 per week in disposable income.
Now their house is probably costing them a minimum of 1,000 per month to rent or to buy, so thats 230 per week which now leaves them at 270 per week left.
We havent figured groceries and thats probably 100 per week.
So now we have 170 per week disposable income.
Problem is, a hot water heater goes out, and that blows the remainder...
Folks, I don't care who you are, or how much you're making.
Lesson's of the last few years have taught me that the majority of people are two paychecks away from disaster.
Now on to the meat of my discussion.
Our country takes many millions to run our country.
This revenue comes from all of us making an average of 52,000 per year and for close to 200 years we have done great.
It is only since the late 80's when we started sending our jobs overseas that this crisis started brewing and its brewing because other countries are following our lead.
If you send our jobs overseas and our national average falls from 52,000 per year to 32,000 per year you will need an additional 40 to 50% of taxpayers to make the same amount of payments to the IRS so that we can run our country at the level that we are currently used too.
In summary, we have virtually no disposable income anymore and all of us, if we have jobs are worried about losing our jobs, so for the first time in our lives, if we have additional money, we're holding on to it.
Something has to give.
Now my question is, why can't our so called experts see this ?
Virgil
http://www.KeepAmericaAtWork.com