Why be a bear on Netflix in the short run?

Increased competition likely to put further downward pressure on profit margins:

Competition is intensifying. Amazon is expanding the scope of its online streaming service. HBO Go and Vudu are other major competitors. Many channels and broadcasters are setting up their own video streaming services; broadcasters will have an advantage because of their competency in producing screen content. This means that Netflix either strengthens its comparative advantage further, while controlling costs at the same time, or it creates some kind of differentiation (again while keeping the operational costs under control).

Netflix is trying hard to increase its revenues. It has expanded its services to countries like Denmark, Finland and Sweden. Such an expansion is likely to give a boost to its subscription revenues while giving it the cost benefits from economies of scale. Successful international expansion may prove to be a game changer for the company in the medium and long term.

Cost control versus revenue generation:

In the short run at least, Netflix’s problems come from its dismal profitability because of very high operating costs. The right strategy, in such a scenario should be to focus more on cost control rather than on revenue generation. However, the company is continuing to focus more on revenue generation by strengthening its product differentiation. Chief Content Officer, Ted Sarandos says that Netflix’s differentiation comes from its ability to let customers watch “what they want, when they want it,” unlike the case with television. However, trying to compete with television may be the wrong strategy for the company. It should focus on the niche customer segment that prefers to watch television programs and movies on the internet.

A bubble without fundamentals:

So there are enough reasons that support the bearish stand on the shares of Netflix. The current bubble in its share prices is likely to burst sooner than later. In the medium and long term things are still not very clear. It is very likely that it may end up getting acquired by a company like Google or Yahoo. In that case, investors who are investing in it with a long term perspective are likely to benefit greatly. For those thinking of investing in Netflix with a short term view there is a word of caution – the bubble may burst sooner than later. Fundamentals do not support such an exorbitant P/E ratio. The stream of Netflix has started flowing but the obstacles in its course are no little.

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