The battle for content delivery has ratcheted up, as Netflix, Inc. (NASDAQ: NFLX ), introduced a new feature for subscribers. Joining Amazon.com, Inc. (NASDAQ: AMZN ), NFLX will now permit subscribers to download some content onto their phones and tablets. What does this mean for Netflix stock?
Source: Via Netflix
This is a reversal of policy for NFLX, which just last year said it would not join AMZN in providing this feature. There are numerous reasons for this move, not the least of which is that Netflix stock must somehow maintain its lofty heights, and anything which risks peeling viewers away to another service must be matched.
Downloading content isn't new. Apple Inc. (NASDAQ: AAPL ) has permitted those purchasing or renting content to download it, and to do so even onto desktop and laptop computers. Amazon joined in. NFLX really had no choice but to provide this as well, because Netflix stock is not generating the earnings or revenue of the other two companies.
Can Netflix Downloads Help NFLX Stock?
Netflix downloads are primarily a retention play to help keep NFLX stock afloat. The company can't risk losing people to other services in cases when watching downloaded content is the only option. Remember, there are millions of Americans traveling by plane every day.
More importantly, internet streaming service is choppy in many developing nations. So for Amazon and Apple, which already have international exposure with their respective offerings, NFLX had to offer the same.
Think about places like India. There's a lot of people in that country, and while their culture is very different inasmuch as the amount of non-Indian content they consume will not be all that great, NFLX cannot permit the other services to gain the upper hand there or Netflix stock could suffer.
NFLX is also forced to act because domestic subscriber growth is slowing, and international growth is thus a key part of its strategy. It continues to lose money internationally, so that's yet another reason why it must keep up.
However, the company is restricted with its download offerings because only Netflix originals can be downloaded. That's because NFLX owns that content. For content that is licensed, the owners don't want anyone downloading content. It effectively means that people can own the content themselves.
There is one element of this feature, however, that should worry holders of NFLX stock. It's that Netflix has to offer this feature, and offer it for free, just to keep pace. There is no new revenue here.
Netflix stock is no longer the only game in town as far as streaming (or downloadable) content. There are many other players, so NFLX had to pivot and become an original programmer like HBO in order to truly compete. After all, all these services are essentially dumb pipes.
Whomever has the deepest pockets can license the best content, and if they want to cut out competition from the very best content, it can create exclusive deals.
Thus, to distinguish themselves from each other, they had to create original programming. I'm frankly baffled why Apple hasn't done this yet, considering its cash hoard. Nevertheless, as far as holders of Netflix stock are concerned, NFLX needs to come up with something other than a non-revenue retention move to justify its stock price.
Bottom Line on Netflix Stock
NFLX stock is outrageously expensive and the company is burning a billion dollars in cash per year. It will have to do another expensive bond offering, all to finance more original content, and will eventually have to raise its prices. You can bet that, at some point, it will be priced at about $15 per month because it will call itself "the next HBO".
That's why I don't suggest buying or holding NFLX stock at this price. There's just too much perfection based in.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter . As of this writing, he has no position in any stock mentioned. He has 22 years' experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com .
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