Netflix (NASDAQ:NFLX) hasn’t made any significant announcements lately that could change the bearish perspective of many investors and analysts. However, the company continues to make small and steady efforts to improve its service. One such effort is improvement of its user interface, especially for the users who use Google’s (NASDAQ:GOOG) Android-based devices for streaming Netflix. The Android app is now similar to that on Apple’s (NASDAQ:AAPL) iPhone and allows the user to scroll through more titles, make tweaks to the layout and offers an enhanced search function. [1] Even though this may look like a small enhancement, Netflix aims to provide uniform and high quality experience to its subscribers. This is important given the challenges that have emerged for the company in the recent past.
Netflix faced significant subscriber backlash last year that effectively flattened its subscriber growth and led to DVD subscriber declines. Even though streaming subscriber growth has resumed, overall growth remains stunted. Further, the company is facing other challenges in the form of increasing competition, high content acquisition costs and loss of some content over pricing issues. These challenges have only become stronger.
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While Amazon (NASDAQ:AMZN) has struck critical deals such as the one with EPIX to enhance its content, Verizon (NYSE:VZ) and Redbox appear to be getting close to bringing their streaming service to the U.S. customers. [2] This service may be available as early as this year end.
Rising competition in the U.S. is one of the biggest challenges for Netflix in the future. Apart from this, maintaining quality content is another challenge. Bringing on additional quality content is getting more difficult from a price point and, to make matters worse, Netflix has lost some of its library content in the recent past. The latest being the loss of content from A&E Networks due to contract expiration. The talks of renegotiations haven’t worked out so far and this will affect customer experience. [3]
In essence while Netflix continues to turnaround its business, the negative developments are still overshadowing any progress and so Netflix’s outlook remains clouded. Yet, if the company can continue to maintain its lead and navigate through the current situation, there could be significant value the stock.
Our price estimate for Netflix stands at $96, implying a premium of about 75% to the current market price.
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Notes:- Netflix For Android Gets The New iOS Look, Too, TechCrunch, Sept 24 2012 [↩]
- Redbox-Verizon Streaming to Challenge Netflix by Year-End, Bloomberg, Sept 22 2012 [↩]
- Netflix Loses Rights to Stream 800 Hours of Content From A&E Networks, The Hollywood Reporter, Sept 21 2012 [↩]
