Are the Bears Right About Netflix?

A lot of investors have been skeptical about Netflix before. But is it time to get out?

Jim Mueller, CFA
Jim Mueller, CFA and Austin Smith
Dec 16, 2012 at 12:00PM
Other

In the following video, the Fool's Jim Mueller talks about Netflix and some valid arguments for selling the stock. Investors should always be aware of the bull and bear arguments while investigating the intrinsic value of their shares, and Jim gives us a few areas of caution with Netflix's future performance.

First is the fragility of the virtuous cycle. Netflix is able to bring in more subscribers by providing high-quality content and by offering more content. As long as memberships continue to rise, the company can continue to do well, but if the numbers drop, it would be unable to provide more content, and the whole model would collapse. This was a significant worry during the plunge of subscriptions in Q3 2011.

Then there's the competition. Netflix's business model was the first of its kind and changed the video-rental business forever. Bricks-and-mortar stores such as Blockbuster suffered as a result. Now Netflix is the one being challenged by the likes of Amazon.com and Hulu. Will those competitors have a negative impact on Netflix's earnings? That's a question investors need to examine further.