Legendary rocker David Bowie's song Changes is my investing mantra. Actually, it's more of a siren that blares in my head, as a reminder to stay on top of growth companies. If a market changes, a great growth story could quickly become a one-hit wonder.
Netflix (Nasdaq: NFLX) had its share of detractors early on, but the company concept really caught on. When the company took over the vaunted Wal-Mart's (NYSE: WMT) online business five years ago, you had to believe Netflix was on to something. Now, however, the DVD rental landscape has shifted dramatically because of the economy and competition. The company's latest earnings report provided some concerns for this investor.
Revenues came in 1% light, and new customers are bypassing the flagship three-at-a-time plan versus a one-at-a-time plan in the face of continued economic pressures. My biggest concern is that subscriber acquisition costs leaped 13% quarter over quarter. It's great that Netflix beat earnings estimates, but if it cost it this much extra to do it, I'm not pleased. I don't want it to have to fight harder to get new customers.
The struggle exists because Coinstar's (Nasdaq: CSTR) Redbox concept has really caught on. So while Blockbuster (OTC: BLOKA.PK) is waving the white flag, Netflix must contend with an even more powerful foe that offers convenience and pricing advantage.
The takeaway here is that the home-viewing market is transitioning, and Netflix must also. Streaming video still has a ways to go before it becomes ubiquitous and convenient, which should shift things to Netflix's favor given its technological capabilities. Until then, however, competition is increasing as well as expenses. Even though analysts are projecting 40% earnings growth this year and 35% the following year, with Netflix trading right at 40 times earnings, it gives me pause.
I have considered buying Netflix stock, but I'm holding off giving it any of my Modern Love until the next chapter in the home-viewing saga provides some indication about the future.
