3 Things That Could Derail Netflix's Rally

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What a difference a year makes if you're a Netflix (Nasdaq: NFLX  ) shareholder. Last year the company lost over 75% of its value from peak to trough. So far this year the streaming content provider has rocketed higher by over 39% in just five trading sessions. But, before you become enamored with the magical light show that Netflix has entranced Wall Street with, consider these three potential concerns:

1. Execution
I know this may seem like a third-grader trying to teach a Harvard calculus professor about multiplication, but Netflix needs to show it can execute on its business platform before you consider throwing your hard-earned money at the stock.

Last quarter was nothing short of a disaster with Netflix hemorrhaging subscribers and warning of losses in the coming quarters as it expanded its operations. Today's news that it's expanding its streaming content into Britain and Ireland is fantastic "news," but that news in no way, form, or shape has translated into tangible results yet – and if we've learned anything from Netflix, it's that you wait for the tangible results before you jump on the bull bandwagon.

2. Emotions
We've all been there before and traded more with our hearts than with our heads. I have to assume that there are plenty of investors out there currently sitting deep in the red on their Netflix position just crossing their fingers that the stock continues to skirt higher. Unfortunately, being hoped for and actually performing are two different things.

Netflix simply hasn't met investors' expectations since July. In fact, shareholders have endured a malady of faux pas, including "Qwiskter-Gate," an unforeseen price hike, and the dubious share offering. Emotional trading buried Reed Hastings and his stock deep into the red to end the year and emotional trading has boosted the stock here to start 2012. When calmer heads prevail, I doubt Netflix will be able to hold anything near its current $98 valuation.

3. Competition
Part of the problem with Netflix is that it's competing with some of America's biggest companies with monster-sized cash hoards. (Nasdaq: AMZN  ) began streaming online content in direct competition to Netflix in February last year and will compete horn-to-horn against Netflix in the United Kingdom. The difference with the U.K. is that Amazon got there first (although only for video-by-mail service). Having purchased Lovefilm, an online video rental service based in the U.K. last year, Amazon will look to once again pick on Netflix and, as of this moment, its far inferior cash balance in comparison to Amazon.

The concerns don't just stop with Amazon, however. Coinstar's (Nasdaq: CSTR  ) Redbox movie rental service is cheap even when compared to Netflix's low monthly fee, but it currently lacks a streaming service. Apple (Nasdaq: AAPL  ) TV is likely to be released in 2012. With many of us living in an Apple-centric world and with an enormous mound of cash sitting on its books, Apple's movie library offered through iTunes is only growing. Finally, Google (Nasdaq: GOOG  ) , though still a ways behind Apple in its digital library, offers streaming movie rentals to most newer Android devices. Long story short, there's no lack of competitors wanting a piece of Netflix's pie.

Foolish roundup
The last five days have been great for shareholders long on Netflix, but I really encourage them to think twice about holding after Santa appears to have given them a very late Christmas present. Netflix hasn't shown (to me, at least) any tangible proof that it's changed its ways since July and I would wait until it reports its quarterly results in two weeks before changing my tune.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has owned about five DVD players in his lifetime – he re-gifted four. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Google, Apple, and Motley Fool newsletter services have recommended buying shares of Apple, Google, Netflix, and Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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