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How Apple’s iPhone 5 Launch Saved Netflix’s Dwindling Earnings

September 29, 2012 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
There is still hope for Netflix (NFLX), however, that is as long as Apple doesn’t encroach on its movie streaming business. Apple (AAPL) is a very powerful company and there are very few people that will doubt that fact. Apple is the only technology company that can choose to control the earnings power of other companies at will. Remember that Apple saved Sprint (S) from looming bankruptcy when in 2011, Sprint gained license to sell Apple’s iPhone and it became a success story immediately. That said, at the recent unveiling of Apple’s iPhone 5, some key announcements were made while some expected announcements weren’t made, which saved some technology companies like Netflix, Pandora (P), and Facebook (FB) and also upset some others. Before the launch on September 12, some analysts had predicted that Apple would announce its entrance into the movie streaming business with the launch of iPhone 5, but that didn’t happen.

Background of Netflix’s Troubles

Netflix, a market leader in online movie streaming, was a mainstream DVD rental provider until two years ago when it got transformed. However, just a year after a dramatic surge in its stock prices to about $300 per share, Netflix has plunged in prices due to investors’ concerns on growth, declined margins and a failed plan to establish a new DVD brand. Netflix has been defeated on many fronts lately. Firstly, the management of the company took ill-advised decisions on pricing and product changes and also neglected the need for effective communication with its subscriber base. The effect was that many of its subscribers defected to its competitors. Secondly, Amazon (AMZN) recently declared interest in Netflix’s line of business through the Epix content deal that will surely compete with Netflix for its customers.

Netflix versus Amazon Prime

Though Netflix’s movie selection service was superior to the service Amazon Prime was offering before the deal was announced, the mere announcement of the deal was enough to encourage most subscribers to move to Amazon Prime for movie streaming. In addition, Amazon offered benefits like free shipping and free Kindle book rentals among other freebies to gain more subscribers. Perhaps Netflix would have gained some advantage over Amazon Prime if it provided new release rentals or offered subscribers the purchase of digital copies that wasn’t done simply because the company was already losing ground as a market leader in movie streaming. While Netflix has not announced any new deal for months, Amazon Prime hasn’t failed to add new content on a regular basis.

So, if Amazon posed a real threat to Netflix when it announced its content deal, Apple’s movie streaming deal announcement – if it had of been made on September 12 – would have pushed Netflix completely out of business by now. However, since such an announcement wasn’t made, Netflix has got to thank Apple and take some deep breaths for now, but for how long will that be? This question is raised because the rumors that Apple may be considering offering video and music streaming services to run exclusively on its Apple devices still remain, perhaps to entice its customers to buy its future brands such as the Apple TV.

Netflix: Evaluation and Outlook

Netflix is still a leader in the domestic movie streaming market that is quite limited, although populated with too many competitors. Its earnings have been in decline lately due to intense competition. If Netflix could release new content regularly, maybe the strong downward pressure on its stock will ease a bit and that could allow a bullish trend on its stock price, because it is currently at new lows. At a price earnings ratio of 31, Netflix is still richly valued considering its almost non-existing cash flow. If there are any further surprises from any of its competitors Netflix will definitely hit new lows, which value investors may capitalize on to record some quick gains that may arise once the stock price stages a bounce from oversold conditions. It is to be noted that any company entering the movie streaming business with better financials and aiming not particularly for the profits but essentially to use video streaming to promote its core products and services, stands to surpass Netflix and further weaken its earnings. I would rather recommend maintaining a short buying position in Netflix and keep all eyes open to any activity that may improve or decrease the earnings of the company.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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