) is an online movie streaming company that competes with cable and
satellite operators like Time Warner Cable (
), Comcast (
), Dish Network (
) and DirecTV (
) for streaming and pay-TV services, as well as video rental
services like Redbox.
Our price estimate for Netflix's stock stands at
, significantly below the current market price. The price
difference is largely attributable to our concerns over market
saturation for Netflix. In our previous article on the subject, we
quantified the subscriber base outlook implied by Netflix's current
market price (
Netflix Stock is a Risky Bet with Market Saturation
on the Horizon
One developing trend in this market is the growing popularity of
streaming. Netflix has made moves to beef up its online content,
striking deals with Starz, Epix, Disney and Relativity Media. This
gradual shift has led to decreases in DVDs shipped per subscriber,
as illustrated in the chart below and examined more thoroughly in
one of our earlier analyses (
Netflix Seeing Shift Towards Fewer DVD Shipments
However, Netflix now appears to be getting more aggressive on
this front. While Netflix has passively benefited in the past from
a shift towards fewer DVD shipments, its latest initiative will
play a more active role in accelerating the trend.
Is Shift Away from DVDs Becoming More Forced?
Netflix recently announced that it is removing "DVD queue"
functionality from streaming devices such as mobile phones,
consoles, and tablet computers. Customers will no longer be able to
build and manage their DVD queue from these devices, restricting
their ability to make on-the-fly decisions regarding their DVD wish
list; they will instead have to visit the Netflix website from a
computer in order to access this functionality. The decision has
triggered a widespread negative response from Netflix customers, as
evidenced by recent comments on the company's blog.
Although Netflix claims that the decision was made in order to
free up resources and better focus on streaming content, we think
that the company may be looking to funnel more customers towards
streaming, increasing profitability of this segment in the face of
rising content acquisition costs. It is unlikely that Netflix is
specifically moving to push existing customers towards
streaming-only plans, as these offerings typically command lower
per user subscription fees. But hybrid DVD/streaming subscribers
would certainly appreciate the flexibility and convenience of
having all features accessible from any device.
As consumers spend more time on mobile devices, could Netflix be
looking to shift their focus away from the company's core DVD
rental business? We note that a reduction in DVD shipments leads to
cost saves on postage for Netflix.
We don't anticipate this move to be a catalyst for current
subscribers to seek streaming-only plans, as the content available
online still pales in comparison to the variety of DVD content.
However, it will be interesting to see how the decision affects
brand image and future subscriber additions. The chart below
highlights Netflix's stock value sensitivity to subscriber
Register to win a free iPad. Visit our home page
See our full analysis for Netflix stock here.