Analyst urges caution when viewing positive Netflix results
A Seeking Alpha analysis says the market should take a more cautious approach to its exuberance about the beyond-expectations results Netflix (Nasdaq: NFLX) posted last week.
Written under the name Valuentum, the analysis noted that Netflix could be in for some hard times as the cable industry, meaning multichannel video programming distributors (MVPDs) as a whole, start to further roll out Internet TV via TV Everywhere and use their deep pockets to tighten their grip on content.
"Cable has been so profitable during the past few decades because there was little competition to bid up content costs," the analysis said. "However, with more entities moving into the TV space, content costs will likely continue to rise, forcing Netflix to dig deeper into its coffers to acquire exclusive content."
Netflix is riding the crest of a market wave after reporting better than anticipated fourth quarter results, including a 13 percent year-over-year revenue increase and domestic subscriber additions of 2.05 million. While the news was good, it "shouldn't be the surprise that it turned out to be," the analysis continued. "Netflix is quickly becoming a relatively strong substitute for cable due to its incredible amount of content, significant lower price point, and the flexibility of consumption possible as a result of its on-demand nature."
Even CEO Reed Hastings attempted to damp down the enthusiasm by noting that "competition for viewing time will increase over the next several years… as consumers come to expect Internet TV on demand viewing for all their video entertainment."
It all adds up to a feeling of unease in a time when the company and shareholders should be celebrating, the analyst concluded.
"We thought Netflix's quarter was incredibly strong on the subscription side and normally we'd be ecstatic about a sticky business adding lots of subscribers and generating tons of highly profitable marginal revenue," Valuentum said before adding the big qualifier. "Unfortunately, the cost of the equation is becoming more challenging for the company, so we're not jumping headfirst into the name in our Best Ideas Newsletter portfolio."
- Seeking Alpha carried this analysis (sub. req.)
Netflix makes money, gains 2.05M domestic subscribers
Widened consumer electronics space, exclusive content driving Netflix
Survey finds 37% of consumers have used TV Everywhere services