Is Netflix (NASDAQ: NFLX) in Trouble?

If you currently own or have ever thought about owning shares of Netflix, Inc. (NASDAQ: NFLX), now might be a good time to start paying close attention.

During the prior week’s market sell-off, Netflix stock got absolutely hammered. Over the course of five trading sessions, the price fell from a near all-time high of $125 to $96 a share. Many investors saw the dip as an opportunity to buy the company at a discount — and for the short-minded, that turned out to be a brilliant-looking call.

Following what many have already dubbed “Black Monday,” Netflix shares rebounded nearly 25% in just three days. The bulls came out cheering in full force, and even Cramer beat his chest on Twitter, graciously thanking his followers for their admiration of his stock-picking prowess.

But as is often the case with daily price-watchers, Jim Cramer and the concurrent legion of Netflix optimists may have begun celebrating too soon.

In the days that followed the tweet above, shares proceeded to tumble ~12%, well below the $115 mark Netflix was trading at in mid-July when Cramer said the stock was “too cheap.”

Netflix (NASDAQ: NFLX) in Trouble?

Now, just to be clear, I’m not telling you Jim Cramer is definitely wrong about Netflix, but his assertions that the company is the “channel to the world” and should be worth over $100 billion are very much hyperbole.

While Cramer seems to think Netflix’s grip on television streaming is set in stone, I just can’t bring myself to agree with the same level of hubris that Netflix is the end-all, be-all of TV…

The one thing you need to keep in mind about Netflix is that the company doesn’t have any meaningful intellectual property — just a few broad business model patents, which are either a) outdated (DVD mailing) or b) not specific enough to build an economic moat.

But you don’t need me to tell you that; Netflix will do it for you:

While our patents are an important element of our business, our business as a whole is not materially dependent on any one or a combination of patents.

The reality of Netflix is that the one thing it’s materially dependent on the most is content. Without quality content, viewers will migrate, and there is simply no guarantee Netflix will remain successful in this respect.

What’s especially concerning on the content side is that Netflix announced on its company blog just last weekend that the service would be losing a slew of big-ticket blockbusters next month. Specifically, the company is losing all Epix — jointly owned by MGM, Lion’s Gate, and Paramount — films.

Meanwhile, we have decided not to renew our agreement in the US with Epix, the cable network, which means that some high profile movies including Hunger Games: Catching Fire, World War Z and Transformers: Age of Extinction, will expire at the end of September in the US. If you want to see them on Netflix US, now is the time.

Within hours of this announcement, streaming competitor Hulu announced it would be scooping up all this content in a multi-year deal with Epix and that customers can expect “thousands” of new titles to hit the Hulu library for the first time.

This includes popular titles such as The Hunger Games: Catching Fire, Transformers: Age of Extinction, Teenage Mutant Ninja Turtles, Star Trek: Into Darkness, World War Z, Wolf of Wall Street, Jack Ryan: Shadow Recruit, Robocop, God’s Not Dead, and many others.

Of course, Epix wasn’t the only source of blockbuster content for Netflix — a recent deal with Disney gives it access to Pixar, Marvel, and Lucasfilm, which are all incredibly valuable. But the loss of Epix certainly highlights the fact that Netflix will forever have to bid for media and won’t always come out on top.

Snapping at its Heels

Hulu also isn’t the only alternative streaming service out there making moves — Netflix is facing growing competition from Amazon, HBO, Sling TV, CBS All Access, and many others.

In fact, Netflix’s market share for over-the-top content is expected to fall from 85% in 2014 to ~50% in 2018, according to research and consultancy firm MTM.

Even more alarming for Netflix is that the latest player to enter the video streaming mix is none other than Apple Inc. (NASDAQ: AAPL), a company with not only unmatched brand awareness but also enough cash on hand to out-bid Netflix for major content wins whenever it deems fit.

Now, fans of Netflix stock will be quick to point out the company’s recent success in original, higher-margin context — but the truth is these shows are few and far between and may not even be as popular as some might think.

According to Procera Networks: “Anywhere from 6-10% of subscribers watched at least one episode of House of Cards,” and following the latest release of the series, there was “no appreciable increase in Netflix’s overall traffic.”

Netflix does not release its viewership data, but the consensus estimate for House of Cards ranges from 2 million to 4 million on its opening weekend. That’s a lot, but for perspective, CBS ended last year with an average prime-time delivery of 12 million nightly viewers.

All said and done, the average CBS program has, at the very least, twice as many viewers as Netflix’s House of Cards (its biggest hit yet), so while it’s true that original content is of growing importance, we’ve yet to see any data that the company can compete for viewership on its own.

At a current earning multiple of 236, lack of compelling viewership data, and so much competition snapping at its heels, I can’t help but find it hyperbolic to consider Netflix “cheap” right now. Cramer’s no dope, but I wouldn’t put my money on a $100 billion cap just yet.

Until next time,

Jason Stutman

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