2-Star Stocks Poised to Plunge: Netflix?

Based on the aggregated intelligence of 160,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, movie rental service Netflix (Nasdaq: NFLX  ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Netflix's business and see what CAPS investors are saying about the stock right now.

Netflix facts

Headquarters (Founded)

Los Gatos, Calif. (1997)

Market Cap

$5.65 billion

Industry

Internet retail

Trailing-12-Month Revenue

$1.77 billion

Management

Founder/CEO Reed Hastings

CFO Barry McCarthy, Jr.

Return on Capital (Average, Past 3 Years)

24.2%

Cash/Debt

$266.3 million / $200 million

Price-to-Earnings (NFLX and S&P 500)

49 and 20

3-Month Return

116%

Competitors

Blockbuster (NYSE: BBI  )

Coinstar's (Nasdaq: CSTR  ) Redbox

Sources: Capital IQ (a division of Standard & Poor's), Morningstar, and Motley Fool CAPS.

On CAPS, 16% of the 7,652 members who have rated Netflix believe the stock will underperform the S&P 500 going forward. These bears include compfreak999 and All-Star TMFDeej, who is ranked in the top 1% of our community.

Just last week, compfreak999 wrote that Netflix bear case all boiled down to price: "Love the company, love their direction, love their innovation. Hate their overvaluation."

In a reply pitch from three days later, TMFDeej expanded on the stock's digital downside:

DVDs are hurting and so is the US Postal Service. ... I canceled my Netflix subscription a while ago, partly because I didn't have enough time to watch full movies with lots of work and two young kids, but partly because it's so much easier to just push a button and watch a movie whenever I want to right on my television or computer.

The real question that one has to ask themselves when buying this stock is what competitive advantage does Netflix have in the download arena? ... Perhaps Netflix will adapt well and it will eventually become the king of pay-per-view, it seems like a fairly well-run company, but I wouldn't pay 40 times earnings to find out if that is going to happen.

What do you think about Netflix, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Netflix is a Motley Fool Stock Advisor pick. The Fool's disclosure policy always gets a perfect score.


Read/Post Comments (13) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2010, at 12:09 PM, weslindsey wrote:

    There's a possibility of NFLX going international, which would be a boon. You can stream movies on demand to your computer any time you want, and if you have a gaming system, e.g. Wii, you can stream the movies right to your TV via the wireless Wii connection, in HD.

    Who needs HBO or Showtime?

    I think the price will continue to rise.

  • Report this Comment On April 27, 2010, at 12:23 PM, delazzer wrote:

    Fools beware!! Who will be the real winner of the death of Blockbuster. It won't be Netflix. They already picked up the heavy users from Blockbuster over the past 2 years. When Blockbuster does die redbox will be uniquely positioned to feast off the remaining $3 billion dollar carcass. Currently redbox is just under $1 billion in revenue and it's revenue will double in the next 12 months when BB does go belly up. Add the high possibility of redbox going on line with its own subscription model and redbox has a real opportunity to hit Netflix where it hurts. Where can Netflix hurt redbox? redbox will have 35,0000 kiosks placed at grocery locations around the US. When they start to tap into loyalty card programs it will be a real game changer. Netflix has been the darling in this space but i say the Emperor has No Clothes

  • Report this Comment On April 27, 2010, at 12:23 PM, delazzer wrote:

    Fools beware!! Who will be the real winner of the death of Blockbuster. It won't be Netflix. They already picked up the heavy users from Blockbuster over the past 2 years. When Blockbuster does die redbox will be uniquely positioned to feast off the remaining $3 billion dollar carcass. Currently redbox is just under $1 billion in revenue and it's revenue will double in the next 12 months when BB does go belly up. Add the high possibility of redbox going on line with its own subscription model and redbox has a real opportunity to hit Netflix where it hurts. Where can Netflix hurt redbox? redbox will have 35,0000 kiosks placed at grocery locations around the US. When they start to tap into loyalty card programs it will be a real game changer. Netflix has been the darling in this space but i say the Emperor has No Clothes

  • Report this Comment On April 27, 2010, at 1:30 PM, Midlana wrote:

    Don't forget that when the USPS stops Saturday delivery, Netflix stands to cut overhead by 1/6 by no longer shipping product one day a week. Since monthlys subscription rates are fixed, that means Netflix's profits will rise by ~16% all for doing absolutely nothing at all...

  • Report this Comment On April 27, 2010, at 2:01 PM, henrydwu wrote:

    Saturday delivery is very important to many Netflix users. Imagine how many users would cancel when USPS stops Saturday delivery.

  • Report this Comment On April 27, 2010, at 2:14 PM, tjsimone wrote:

    The fate of Netflix on TMFDeej & his inability to find a little time to watch some movies. Yeah, the $10 monthly charge is quite burdensome,

    ***Newsflash guys*** Netflix competitive advantage is as follows:

    Netflix monthly cost is the cost of 2 Pay Per View movies on Cable, DTV, and Fios.

    Netflix now has 14 million loyal customers, other than TMfdeej, up 35% from prior year. Isnt that what every company is looking to achieve? Brand Loyalty?

    This article is drivel.

  • Report this Comment On April 27, 2010, at 3:52 PM, idamoore wrote:

    Analysts have been predicting the crash of Netflix since November. Hmm.

    In the meanwhile, those who sold regretted it.

    Shareholders who may also be subscribers hold on.

    Has anyone really looked at what Redbox offers?

    How many times do you want to watch Slumdog Millionaire or Clash of the Titans (when it goes to dvd) or even Avatar if you are more than 16 years old?

    NFLX has so many movies on streaming most people have NEVER seen. And it is not because they are bad movies.

    Also, anyone who moans when they see the trash at the multiplex, geared to the audience of 16 year old males or truly dumb "chickies", could delight in the international movies that have NEVER played at a theater near you in the US.

    And, as mentioned by someone above, what if NFLX goes international?

    More people have access to computers than have

    indoor plumbing.

    And as also mentioned above, the $8.99 1 disc at a time with unlimited streaming is so much cheaper than Redbox in just two weekend's worth of viewing.

    NFLX will go up and down. But I bet on the long run.

  • Report this Comment On April 27, 2010, at 4:12 PM, chuck245 wrote:

    I think (not a genius) nflx has a bright near term future. I can't understand how mailing 35,000 pcs. on 5 days is 16% cheaper than mailing 6 days LOL

  • Report this Comment On April 28, 2010, at 11:55 AM, tecon wrote:

    Netflix is and has been planning to be the premier entertainment medium since it's inception. They have and will continue to be the model for home intertainment. No one can catch up with these guys as long as they keep doing what they do best...plan for the future. Can you say "world wide video on demand"?

  • Report this Comment On April 28, 2010, at 12:39 PM, bryanjc28708 wrote:

    Long term, maybe Netflix doesn't have legs. I'm not foolish enough to think that any company has a stranglehold on an industry past, say, years.

    Those DVD kiosks aren't much of a player right now. Sure they make money, but their selection is very, very limited. And unlike Netflix, they have no customer data. Netflix has an Amazon.com-like treasure trove of your likes and dislikes -- anyone here think that this data isn't valualbe to a movie company like Dreamworks, or Disney?

    This past quarter's reports missed one thing -- the impact of Netflix's recent Wii integration. There are 70 million Wii systems worldwide. 18 million in North America alone. For $9 a month, you can stream content through a Wii as much as you want, with a user interface that took my 4 year old daughter 10 minutes to master.

    Anyone think that's not significant?

  • Report this Comment On May 27, 2010, at 5:29 PM, tjsimone wrote:

    "Staying Away" from Dangerous stocks?

    Since the Article has been posted, the Nasdaq has corrected 8%

    Netflix is up 7%

    I would therefore conclude that Netflix is not a " Dangerous " stock.

    Good Luck investing!

  • Report this Comment On May 27, 2010, at 5:31 PM, tjsimone wrote:

    'If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them"

    Nice job guys!

    Since this article posted:

    Nasdaq -8%

    Netflix +7%

    I am glad i stayed away from those " Dangerous" Stocks!

    Good Luck investing!

  • Report this Comment On June 11, 2010, at 11:11 AM, tjsimone wrote:

    Good Call....

    Netflix now up +18% since this drivel came out...

    Motley Fool is my contrarian indicator....

    Good Job Brian!

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