This week, as I opened my red Netflix
Netflix investors had pondered the possibility for years, and the Gardner brothers asked CEO Reed Hastings about advertising in this 2003 interview. But despite Hastings' change of heart, I just don't see this latest development as sufficient justification for Netflix's current price.
Is it a good idea for Netflix to advertise ancillary products alongside its DVDs? Of course. I'm sure that many companies are hard-pressed to find a more focused audience for their products. Will it bring Netflix more money? Yup. That growing horde of 4 million subscribers who watch at least four to five movies each month is a prized demographic for more than just popcorn sellers.
But that still doesn't mean you should buy shares at these levels. (Don't short them, either -- but that's another column.)
Advertising in mailers is the latest in a string of logical new features that bring a little more money into the company's coffers. It follows Netflix's deal to annexWal-Mart's
While competition from Blockbuster
That churn rate is Netflix's biggest risk. It's coming down -- top-line customer churn was 4.3% as of the latest earnings announcement -- but not nearly fast enough. Though subscribers are signing up by the hundreds of thousands, investors shouldn't forget those customers who quietly slip out of the party through the back.
Netflix's current torrid growth can't continue forever -- but right now, Netflix is priced as if it will. The company is currently forecasting pre-tax income of $50 million to $60 million (which is about $36 million to $40 million after taxes) next year, which still prices its stock at 43 times 2006 earnings. As far as I'm concerned, no amount of advertising on those red mailers will justify such lofty expectations.
Rewind for further Foolishness:
Netflix is a Motley Fool Stock Advisor recommendation.
The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our Foolanthropy discussion board through Nov. 6. For guidelines on what makes a charity Foolish, visit www.foolanthropy.com .
Fool contributor Marko Djuranovic does not own shares in any of the companies mentioned.