Are the End Credits Rolling for Netflix?

Shares of Netflix (Nasdaq: NFLX  ) hit a 52-week low last week. Let's take a look at how it got here to find out whether there are still cloudy skies ahead.

How it got here
If you're one of the 30.1 million subscribers Netflix had at last count, you might want to go check out 2003's Hulk, directed by Ang Lee. It's a pretty good depiction of Netflix's woes. Netflix created a growth-stock monster with expectations it couldn't control, and then … MARKET SMASH! Replace bad special effects with laughable PR blunders, and you've got Netflix in a nutshell.

This week's comic-book-style carnage, which reversed a brief summer rally, can be blamed on its latest earnings report. Despite beating analyst expectations on top and bottom lines, Netflix's admitted uphill battle toward its year-end subscriber goals sent shareholders scampering. Netflix is now, by a wide margin, the worst-performing entertainment purveyor of its ilk. None of its direct competitors has suffered more than a flat 52-week period as Netflix has cratered:

NFLX Total Return Price Chart

NFLX Total Return Price data by YCharts

Amazon.com (Nasdaq: AMZN  ) , which barely made any profit in its latest quarter, and will probably face a loss in the third quarter, seems to be completely resistant to any sort of market negativity over its high-cost growth strategy. Reed Hastings might be more than a little jealous of Jeff Bezos' ability to disregard Wall Street's pleas for profit growth by now. Of course, Amazon has its fingers in quite a few more pies than Netflix.

What you need to know
Just because Netflix has fallen down doesn't mean it'll stay there forever. Let's take a look at how it compares with its peers on a few key metrics:

Company

P/E Ratio

Price to Free Cash Flow

Net Margin (TTM)

3-Year Annualized Income Growth

Netflix 19.3 30.9 4.8% 11.6%
Amazon 181.7 87.2 1.1% (14.7%)
Coinstar (Nasdaq: CSTR  ) 12.3 8.4 7.5% 40.3%
DISH Network (Nasdaq: DISH  ) 10.1 7.9 9.2% 27.8%

Source: Morningstar.

Netflix is nowhere near as highly valued as Amazon, but the wide discrepancy between its earnings and its cash flow could be cause for concern. However, neither company can hold a candle to Coinstar and DISH's reasonable valuations, particularly in cash-flow terms. Both companies operate at varying levels of capability in both physical DVD rentals and streaming. Coinstar is set to launch its streaming service partnership with Verizon (NYSE: VZ  ) at some point later this year, which could put further pressure on Netflix's online growth plans if the new service offers a deep enough library at an attractive price.

Netflix's recent bottom-line struggles have made both competitors look good by comparison. Since last year, Coinstar has absolutely trounced Netflix in this regard, and DISH now has a better five-year growth rate as well:

NFLX Revenue TTM Chart

NFLX Revenue TTM data by YCharts

If Netflix can't turn its declining profits around, then it won't matter much that it expands overseas or boosts its subscriber numbers. It's past the growth phase now in the market's eyes, and investors are looking for sustainable profits.

What's next?
Netflix may not recover for a while. Its content costs are likely to keep rising, and competition isn't going away. The company will need substantial streaming subscriber growth to overcome shriveling DVD subscriber rolls. Its best weapon is the depth of its library, which is still the best available online, though no one company has a truly complete lineup. Overseas growth will be important as well, but that's a long-term strategy that might not show positive results for some time.

The Motley Fool's CAPS community has given Netflix a two-star rating, with 82% of our CAPS players expecting the company to recover and beat the indexes going forward.

Interested in tracking this stock as it continues on its path? Add Netflix to your Watchlist now, for all the news we Fools can find, delivered to your inbox as it happens. Looking for the next great growth stock? Check out our free report on "3 Stocks to Own for the New Industrial Revolution." You couldn't get into car companies 100 years ago, but this will be just as big. Get the free information you need.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.

The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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