Amazon Is About to Intensify Your Living Room With 4K Ultra HD

Amazon is one of the most innovative companies around, and it’s ahead of Netflix for a new technology.

Jan 11, 2014 at 7:00AM

A silver bullet travels in slow motion toward a terrified protagonist. You're enjoying the scene in this surprisingly suspenseful movie from the comfort of your own home -- popcorn in hand. Despite knowing it's a movie, you're nervous, hoping the hero attempting to save the world -- and the girl of course -- manages to escape.

This scene has been played out hundreds of times in movies, but never before in 4K Ultra HD. With this new technology, you won't just see that slow-motion bullet traveling, fighting against gravity and drag, but you will see the detailed design of that bullet. Better yet, you will see the wrinkles below the potential victim's studying-and-concerned eyes along with every crack in his dry and pursed lips. Now imagine this type of detail for all your favorite programs, whether it's sports related or your favorite drama series.

The 4K Ultra HD experience won't be enjoyed by everyone in the near future, but it's a new technology that's likely to see growing demand. Two companies are at the forefront of this technological advancement: (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). However, if you're looking at the potential of this technological advancement from an investing standpoint, then Amazon might be more appealing. Here's why.

More partnerships
Amazon and Netflix both announced their 4K Ultra HD plans -- minus specifics -- at the Consumer Electronics Show in Las Vegas. Netflix's big announcement was that House of Cards season two would be available in 4K Ultra HD.

Note: 4K Ultra HD pertains to 3,840 x 2,160 pixels, much more detailed than the best HD available up until now: 1,920 x 1,080 pixels. The reason 4K Ultra HD has the "4K" in it is because the pixel count is near 4,000.

Getting back to Netflix, it also announced that it has partnered with Sony so new televisions can deliver top-quality content. 

A partnership with Sony is nice, but Amazon Instant Video has announced partnerships with major movie studios, including Time Warner's (NYSE:TWX) Warner Bros. and Lions Gate Entertainment (NYSE:LGF). Having such big names at its side, Amazon is setup well for success. This is also a potential positive for Warner Bros. and Lions Gate Entertainment. If their content can be viewed in higher quality, then that content is likely to see increased demand. 

Other Amazon partnerships include 20th Century Fox and Discovery. And instead of announcing one series being shot in 4K Ultra HD, as Netflix did, Amazon has announced that all of its original series in 2014 will be shot in 4K Ultra HD. It should also be noted that Samsung is preparing to launch its biggest line of Ultra HD TVs in 2014 and that it's excited to work with Amazon Instant Video.

Amazon and Netflix have been big winners over the past year, seeing stock appreciations of 48% and 240%, respectively. With those kinds of returns, it seems as though we're living in an age of relentless stock appreciation, but this comes with a risk.

From an investment perspective
Amazon and Netflix are trading at 151 and 84 times forward earnings. In layman's terms, expectations are extremely high. The good news is that Amazon and Netflix continue to deliver on the top line. Look at the past year as an example:

AMZN Revenue (TTM) Chart revenue (trailing-12 months) data by YCharts

The bad news is that with expectations so high, any slip-ups will likely lead to swift sell-offs in these stock prices. Since these are both growth companies, the majority of their capital goes toward reinvestment in the businesses. Therefore, there's no dividend yield to rely on if either of these stocks sell off. 

All that said, both companies demonstrate excellent debt management. Amazon and Netflix sport debt-to-equity ratios of 0.3 and 0.4. And Amazon generates significant operating cash flow, to the tune of nearly $5 billion over the past year. Netflix isn't as impressive in this area, generating approximately $43.6 million in operating cash flow over the past year.

The Foolish takeaway
Amazon and Netflix seem very expensive for investors. That being the case, despite being confident in long-term business prospects, especially for Amazon, I'd recommend being cautious initiating any new positions. If we ignore valuation and focus on underlying businesses, Amazon is better positioned for 4K Ultra HD, and it's more diversified with its online store, tablets, and cloud computing. 

But are these the real future winners in the living room wars? 
Television, as we know it, is on the verge of a transformation. The companies that prevail in this epic disruption could go on to earn their shareholders untold sums of money. And the companies that lose could very well end up in bankruptcy court within a matter of years. With this in mind, our top technology analysts created a groundbreaking free report that sorts out the likely winners from the losers. In doing so, they reveal the handful of companies that are best positioned to make their shareholders exceptionally rich over the next few decades. To download this invaluable free report before the rest of the market catches on, simply click here now.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. 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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