Netflix Stocks Struggling For Stability Amidst Video-Streaming Race

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Mar 16, 2015

As American households embrace internet-based video streaming, Netflix (NFLX, Financial) is finding itself in a volatile state, especially after taking 8% plunge since February 26, 2015 when it was last known to be at its peak. The video-streaming service provider had gained significantly in the fourth quarter of 2014 on the basis of an increased customer base, but the stock seems to be on shaky ground primarily due to the confusion among analysts as to what the ideal range for the stock ought to be, given the conditions of the company. What makes the situation noteworthy is these doubts are also arriving at a time when video streaming services are making a strong entry into American households (around 4/10 households using such services), but it seems that the increasing competition is hurting Netflix’s position in the market. Amongst using internet based video streaming, 36% homes have Netflix, which comes with a sizable library of content to offer, but Amazon (AMZN, Financial) and Apple (APPL) are making moves with big plans to capitalize on this market trend.

Netflix generated a contribution margin of 28% in the U.S. market in the last quarter of 2014 alongside revenue of $1.48 billion and the EPS of $1.38 a share. Expectations are that it will go up to 30% of the sales in the first quarter of 2015. They then mentioned that, with the similar growth rate, the contributory margins will rise to 40% by the year 2020. But until the international markets respond favorably, especially those explored in recent times, there could be a standstill situation for growth opportunities for Netflix, especially with competitor moves.

Competitor speak

Amazon already is known to have 40,000 options to choose from its service called "Prime Instant Video." They are also looking aggressively into producing original content via the Amazon Studios, and their fair share of loyalty to go with it. Apart from the 13% American household market share, the Consumer Intelligence Research Partners had reported that consumers of Amazon Prime services watched videos on it more often than Netflix users did on their subscribed services. The aggressive strategy that Amazon has adopted for adding consumers to its fold, which is offering a more customized set of services via the Fire TV and the Fire TV Stick, is something that will eat into the Netflix customer sooner or later.

Apple Inc. is best known for handheld and desktop personal computing devices, but their interest in television with the adaptability of the internet in the U.S. is something many expect to come to the forefront of their offerings. Together with Time Warner (TWX, Financial) HBO, users will now be able to use the HBO Now services on their Apple devices such as the iPad, iPhone, Apple TV at a cost of $14.99 a month. To get more people hooked on their services, the first month will be offered free of charge, and recently Tim Cook even announced a slash in the prices of Apple TV from $99 to $69.

Final thoughts

Netflix stock is known to move within a fixed range, which might a sign of stability for the short term. It was known to be the region of $430 to $480 for four months last year, just like the last month this year. The last closing $438.40 a share for Netflix, however, was a $9.92 (2.21%) dip from the previous closing price, thought it was within the range as forecasted. However, with expansion taking place rapidly in markets like Australia, could be a saving grace if it takes good on the services offered there, overcome challenges like the Stan and Presto (a JV of Fairfax and Channel Nine) competition, or perhaps take on an Australian partner for a more aggressive approach in the market, the volatility factor would be minimized. In the home market, something like product differentiation just might help for a longer term plan, but margins will need to be looked into.