I have to admit Netflix
Some of the move back up can be attributed to investors who may have missed David Gardner's recommendation of the stock more than 100 points ago, worried about missing another run. However, investors are also excited about the company's new content-sharing agreement with Epix, which will allow the company to stream content produced by Lions Gate
While the deal will certainly help draw some new subscribers, as Netflix now has access to a much greater library of content, the cost of the deal only furthers the bear case I spoke of.
In 2008, Netflix inked a very similar content-sharing deal with Starz. This deal gave Netflix the right to stream Disney
Netflix's price appreciation over the past few years has been a growth story, but more importantly, a margin story. Margins have grown from 5.6% in 2007, to 6.1% in 2008, and 6.9% in 2009. However, as the premium continues to increase just to gain access to the content customers crave, these margins will see continued pressure.
Stifel Nicolaus analysts believe that Netflix will have to attract 500,000 more customers per quarter than the company is currently estimating in order to maintain its current margin growth. This seems pretty unlikely, and even more costly if the previous quarter's subscription statistics are any indication. In the second quarter of this year, the company brought in 600,000 fewer subscribers than the previous quarter while spending the same amount on marketing to attract new customers.
Netflix is clearly impressing investors with its continued growth and innovation. However, a company that trades at a price-to-earnings ratio above 50 needs to always be at peak performance. Competition for content and customers still makes me believe this will be difficult to achieve.
Andrew Bond owns no shares in the companies listed. Netflix is a Motley Fool Stock Advisor Pick. Walt Disney is a Motley Fool Inside Value choice, and Disney and Netflix are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.