The Wall Street Journal's "Heard on the Street" column suggests (subscription required) that Netflix (NASDAQ: NFLX) is overvalued: "The DVD mail-order business's stock has doubled since November, taking it to a rich valuation of 26 times estimated 2009 earnings -- a loftier multiple than either Google or Apple."I've been bearish on Netflix for a long time and admittedly, the market has proven me wrong. But here's the problem with Netflix at 26 times earnings: The company's business model of renting DVDs by mail has a definite expiration date: Maybe it's five years, maybe it's 15 years.
Now CEO Reed Hastings counters that the company's business isn't really DVDs by mail: It's home entertainment, and the company is investing aggressively in digital delivery.
But there is tremendous risk associated with that. First, a number of other companies, some better capitalized, are investing in the same technology. Second, there's a very real question of whether, even if Netflix is able to win the streaming video bakeoff, it will be able to do so with margins that generate strong returns for shareholders. New technology is extremely exciting but its benefits have a way of accruing to the consumer rather than the innovator, especially in a field so fraught with competition and price wars.
Netflix may well prove its bears wrong, but at 26 times earnings, it will have to do something pretty impressive.
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Reader Comments (Page 1 of 1)
3-23-2009 @ 1:09PM
lysaof said...
As a happy customer, I just wish they would hurry up and start offering games. I would think maybe buying out or merging with or being bought out by gamefly would be smooth buy maybe they dont need to just start offering video games as part of my 3 dvds.
3-23-2009 @ 2:15PM
Kate said...
I like the streaming aspect of Netflix. While waiting for movies to arrive (I subscribe to 4 at a time, but live in a rural area, so if we get four movies a week, we're lucky). There are a lot of wonderful movies and TV shows you can watch online, which I'm really enjoying. The only downfall is sometimes the movies have to " buffer" and you're stuck waiting several minutes for the film to start again. I wish Netflix could improve that aspect of streaming. Watching TV shows and movies elsewhere online, I never have that happen. Netflix states "your internet service has slowed", but mine is still rolling with 5 bars, so it's really an Netflix problem. Other then that, I'm content with Nextflix.
3-23-2009 @ 2:53PM
Demetri Mouratis said...
Netflix has gotten a jump on everyone else in the movie streaming game. As Reed says, "the company name is Netflix, not Mailflix."