October 26, 2011 | In: Opinion, Technology

Will Netflix Go Bankrupt?

NFLX is stuck in a downward spiral since July of this year. Let’s look at NFLX chart since then (courtesy of Google finance):

Figure 1: NFLX chart for the last 6 months. NFLX had a high of $304 back in July of 2011. Today NFLX is trading at a bit less than $77, or just 25% of that high.

I have warned against Netlfix many times before. In my last post about Netflix, I have evaluated Netflix as a company, and I deduced that Netflix is worth around only $2.1 billion, or $40/share. While I stand by these figures in the short term (for the next few months), I believe that Netflix is doomed as a company on the long term, and most likely will go bankrupt, here’s why:

  • Netflix is expanding in emerging and secondary markets at an ambitious rate a scary rate, which is diverting its attention from its primary market: the US market. What’s the point of having mediocre operations all over the world resulting in a mediocre company? It was wiser for Netflix to strengthen its position at home before looking into expanding elsewhere.
  • Netflix is constantly hiking prices, and not even listening to its subscribers who are complaining. Netflix’s CEO even apologized for the late rate hike (and the split of the DVD and the streaming service), but did not back down on it. As an investor, I don’t think there’s the slightest chance that Netflix can get away with this, especially after its subscribers noticed the power that they have over Netflix as a company, as well as its stock.

  • Netflix’s churn rate will continue to increase, revenue will diminish, and overhead will grow. Many subscribers will flee Netflix in the short and the medium term, which will reduce the revenue, which will lead to constrained budgets for marketing (marketing is critical for Netflix to acquire new customers), which will further reduce the revenue. Overhead will also increase because of all the new endeavors that Netflix is undertaking, especially elsewhere (remember that these endeavors are funded by the revenue from the US operations).

  • Competition is looming. Google, Apple, and a lot of mega companies (seeking to diversify their investments) that are very powerful and that have or can acquire the resources to clone Netflix’s service are already working hard to replicate the service. Most subscribers that stayed with Netflix even after it showed its greedy face are staying there because there are no other option. But when there is…

  • Netflix is not enhancing its services. Not only Netflix is splitting its services and over-charging customers for things that they do not want, Netflix is no longer enhancing its services, and, for some reason, it’s keeping itself in the dark especially when it comes to mobile streaming (viewing movies on your smartphone) which has a huge potential in the not-so-far future.

So, let me answer the question of this article. Will Netflix go bankrupt? Most likely, if it continues ignoring its customers and treating them as if they were morons and/or cashcows. Does Netflix has a chance? I believe that at this very moment, the door is still open for redemption, but Netflix should implement the following, fast:

  • Show Reed Hastings the door, and once he’s out, ask someone who understands Netflix’s subscribers needs to step in instead. Once that someone is in, Netflix should lock the door and never ever allow Hastings to get in again.
  • Revert all the price hikes that Hastings imposed on Netflix’s customers. The stock price was better off without the price hike (just compare the stock price before the stock price and today).

  • Sincerely apologize to its customers and make Hastings a genuine scapegoat. Netflix should blame everything negative that happened to the company on Reed (he does deserve the blame after all).

  • Freeze all the expansions, and focus on restoring things to normal.

  • Try to team up with Google especially when it comes to marketing and mobile streaming (this will make Google an ally instead of a competition). Apple will never agree to any partnership with Netflix.

  • Reassure customers that no price hikes are planned in the near or medium future. (My personal opinion that it was very low of Netflix to hike the prices especially when we’re still in the middle of a recession).

  • Focus on mobile streaming. As I stated before, mobile streaming has a huge potential and may become a cash cow in the not-so-distant future.

I think if Netflix follows the above, then it may, just may, have a chance in survival. In any case, I would stay away from NFLX until it reaches $40.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

1 Response to Will Netflix Go Bankrupt?

Avatar

How Much Is Amazon Really Worth? « Fadi El-Eter

October 28th, 2011 at 1:00 pm

[...] have warned against Netflix before, and now look at the results. Now I’m warning against Amazon, even if Amazon has a great result next quarter (and I doubt [...]

Comment Form