Why Netflix, Inc. Must Adapt to Times as Media Stocks Battle it Out
Netflix, Inc. (NASDAQ:NFLX) has been one of the top-performing media stocks over the past year. But investors have been scrambling to the exits, driving the share price down 23% since August 5th.
While it’s not time to worry yet, you have to take a look at what’s happening and why Netflix stock may be setting up for an even bigger decline if the company stays status quo.
Streaming Video Might Not Save Netflix Stock
On Thursday, analyst Ken Sena came on CNBC’s Fast Money: Halftime Report and told the audience why he was bearish on Netflix after reiterating a sell signal. Now this is a rarity on Wall Street as analysts often do not want to dish a company and risk destroying any current or future investment banking deals with the firm.
Wall Street still loves Netflix despite the stock trading at an insidious 320x its estimated 2016 EPS and an unbelievable PEG of 30, which means the stock is trading at 30x its projected five-year CAGR. As this juncture, 25 analysts rate the stock a “Strong Buy” or “Buy” while 14 have a “Hold” and only 2 believe the stock should be sold.
Chart courtesy of www.StockCharts.com
No matter how you analyze Netflix stock, shares are clearly trading at frothy heights. The question is: Is it time to scram?
Here’s my thinking. While I have long been a bull of NFLX stock, I’m also wondering whether the company has another trick up its sleeve.
It’s true the company has a loyal following of over 65 million members in about 50 countries. But there is increasing competition from rivals such as Amazon.com Inc. (NASDAQ:AMZN), Hulu, and HBO, who all offer streaming video services. The space is becoming tighter and Netflix will have to respond.
Of course, don’t forget there are also potential threats from Apple, Facebook, and Google, who all have access to a massive audience.
The point is; when a company like Netflix does something successful, you should only expect to see the vultures swirl around and look to attack.
So far Netflix is harnessing its loyal customers and has ambitious plans to expand to 200 countries. With a potential 1.3 billion eyeballs, China will be a challenge due to its tight control over media and news. Netflix is coming to South Korea, Singapore, Hong Kong, and Taiwan early in 2016. But until it gets deep into China, the battle continues.
Ultimately Netflix will need to offer more to its customers. This will encompass not only newer and original content, but I think the company needs to broaden its product away from just showing steaming video. For instance, why not also offer gaming, live entertainment, shopping, and other Internet services?
Here’ the Bottom Line on NFLX Stock
In my view, diversifying into other offerings will be what prevents Netflix stock from hitting a wall—especially as the other much better players come on board and decide to invade the company’s territory. Unlike a specialized technology, providing video streaming isn’t exactly a unique offering that allows many barriers to entry.