Netflix Rally Could Be a Head-Fake

Netflix Rally Could Be a Head-Fake

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Netflix (NFLX), whose shares peaked at $295 on July 2011, is still in search of a bottom. Shares could be giving a “head fake.” This means the market could be appearing to signal upside, but will then fall even lower.

Throughout 2012, shares found lower lows, an often negative sign that Netflix is bound to keep falling. Netflix began its descent after haphazardly unbundling its CD rental business from its online streaming one. Consumer backlash meant that customers unsubscribed to Netflix, choosing alternative companies like Coinstar (CSTR) or Amazon.com (AMZN) services. At the time, Netflix was also expanding its business outside of North America. Netflix was strategically calculating that it could grow customers globally to make up for the defection of customers in the U.S. The company eventually scaled back its global growth efforts, because customer growth was tepid, and global growth was expensive.

Netflix also has another challenge: buying original content cheaply. The company failed to finalize a contract with John Malone’s Liberty Media (LINTA) last year in September. This meant Netflix lost access to content from Sony Pictures (SNE) and Walt Disney Co. (DIS). Epix and A&E also followed Starz, further reducing the content available on Netflix.

Analysis:

The value of the Netflix business is in its recommendation engine. Its importance is much like that found on Amazon.com for books, music, and video. Netflix is scheduled to report third quarter earnings on October 23. The performance of Netflix stock against past earnings events is illustrated on the chart below (powered by Kapitall.com). This will help you decide on whether to take a position on Netflix now or to wait until after earnings:

Business Section: Investing Ideas

Companies mentioned in this article are:

1. Coinstar, Inc. (CSTR, Earnings, Analysts, Financials): Provides automated retail solutions primarily in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Market cap at $1.4B, most recent closing price at $44.68.

 

2. Amazon.com Inc. (AMZN, Earnings, Analysts, Financials): Operates as an online retailer in North America and internationally. Market cap at $110.75B, most recent closing price at $244.99.

 

 

3. Liberty Interactive, Inc. (LINTA, Earnings, Analysts, Financials): Engages in the live-action theatrical film production and distribution, home video distribution, live-action television production and distribution, and theatrical and non-theatrical animation businesses primarily in the United States. Market cap at $11.34B, most recent closing price at $18.95.

 

4. Sony Corporation (SNE, Earnings, Analysts, Financials): Designs, develops, manufactures, and sells electronic equipment, instruments, and devices for consumer, professional, and industrial markets worldwide. Market cap at $11.42B, most recent closing price at $11.37.

 

5. Walt Disney Co. (DIS, Earnings, Analysts, Financials): Operates as an entertainment company worldwide. Market cap at $91.89B, most recent closing price at $51.21.

 

 

Written by Chris LauTo interact and discuss these picks with users, attach your watch list or portfolio to your friends on Kapitall. Message the author. He is ranked sixth (by points) on the all-time leaderboard. The leaderboard is located on your score icon -> Leaderboard.  Members on Kapitall earn free points, and even more points with every Kapitall Generation trade. These points may be redeemed for goods at the Kapitall store. 

 

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4 Responses to “Netflix Rally Could Be a Head-Fake”

  1. TFH says:

    I stopped my NetFlix account – they never had the films I wanted to see.

  2. Harold Gardner says:

    If they leverage their content, they will do fine. If they try to leverage their delivery modes, someone will beat them.

  3. tulleuchen says:

    I still use Netflix. I actually use Netflix, Hulu, and Amazon. As they all have their advantages. Hulu is for new Shows. Netflix is for some movies, but also has a good library of shows (no commercials also is great) Amazon well they have some different movies and shows. There is some overlap between all of them though. Though among them all. They will have a problem if they can't even carry a show like The Walking Dead, or stuff similar to that. Shows like Smallville which we also watch (was played directly on their own networks website, but only kept one episode at a time. Whatever business that keeps a complete series library of a show is much more valuable. So they all need to get those deals going!

  4. Chris says:

    The recent rally wasn't anything more than a pump and dump, they don't offer anything unique and the competition is getting stiffer which means less profits. Bigger companies can and will put them out of business because all they offer is streaming via liscensing agreements which larger mobile companies will provide to a larger, more diversified and better run company. I just don't have any respect for a company in which the founders already tried to sell the company twice before it was off the ground.

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