What do we see in the markets?
Currently there are lots of uncertainties in the markets. Federal Reserve kept on decreasing its asset purchase program’s pace, and, according to Janet Yellen’s press conference, many investors expect QE3 to fully expire by this very autumn. Liquidity contraction expectations lead to general market sentiment worsening. There was a strong intraday movement in VIX index as well. So, uncertainties and monetary tightening expectations contributed to volatility increase. Major US indices, like S&P 500 or Dow Jones Industrial Average made a correction after a plummeting at the end of February, but it seems now stock markets are moving sideways, losing momentum.
What happened to the firm and what are our expectations?
Netflix Inc (NASDAQ:NFLX) is an internet based media provider, through which consumers can stream live shows, sport events, movies on their internet connected electronic devices. The company was founded in Los Gatos in the United states, and today their services are available in various countries. Canada, the Caribbean region, certain regions of Latin America and a few EU member states can access the firm’s services. If we look at the chart of the comnpany’s shares, we see that share prices were increasing continuously in 2013, and Netflix shareholders could gain more than a lucrative 300+%. But we can see that the relative base was quite low, since the share prices were plummeting once before in late 2011 after one and a half year of increasing trend. Those months were the months of intensive international expansion, but investors didn’t find the pace of the expansion convincing enough, so shares lost 70-80% of their value within a few months.
The latest intensive increase was supported by the benefits of the matured expansion investments, in 2013 the popularity of services of Netflix grew a lot, especially in an environment when smart-TVs and tablets are more and more affordable for wider layers of society. Increasing profits, growing Earnings per Share, improving operating results and outstanding cash Flow generating ability were the main characteristics of Netflix in 2013.
So, institutional investors also begin to buy into the company’s public shares, supporting price increase, but contributing to higher concentration of share owners. According to Reuters, 88% of the shares were in hands of institutional investors in March, 2014. These investors work according to strict rules and policies, and make their decisions from a quantitative point of view, so unlike individual smaller investors, they cash in immediately when they see the end of a trend.
These current harder times for the share process began in early 2014. The first plummeting was started by a downgrade by Morgan Stanley. The bank’s analysts forecasted increasing competition among Netflix’s peers, so they projected that the firm wouldn’t be able to maintain their current pace of growth. The selling period was short but intensive, shorter term moving averages were broken through in a while, but the 200-period line wasn’t approached at all.
Netflix should stand the competition with the likes of Hulu, HBO (with HBO GO) and Apple Inc (NASDAQ:AAPL), which was just planning a potential entry to this market by that time. In this very case of on-demand media content providers it is also true that strong brand value means competitive advantage. We think HBO could be funding itself easily in case of a drop in market liquidity, and their portfolio is much more diversified. And there are the own-branded own-made exclusive contents and TV shows to entertain the audience. But after a short selling wave, the stocks showed strength again, and broke the shorter moving averages upwards.
But this week, latest news and rumors were revealed about Apple’s entry to the segment. Accordingt to Forbes magazine, Apple is the world’s most valuable brand. And this step leads to a better diversified portfolio for Apple. Though Apple TV is still in an early phase, we think they will enter the market successfully. Their on-demand media services will be available only in the United States in the early stage, since Apple – according to news and rumors – is about to sign a cooperation agreement with Comcast cable services provider (Cable TV and Internet). This can mean an advantage for Apple, as they plan to provide their on-line media services separately from other public internet contents and connections. And they will use Comcast’s cable lines for this. So, the quality of the service won’t be depending on how crowded a given channel will be, which is still a problem for streamers.
Moreover, Apple is developing an own-branded set-top-box with the well-known Apple logo on it, which will be surely bought by the devoted fans of the brand. So this way Apple provides more than just media content, they provide a full Apple technological ecosystem finally, as TV services were the missing piece of the set of smartphones, computers, music players and so. Because of the expected best use of synergies, we expect this project to be closed with success.
In summary, we see that Netflix share prices kept on falling to Apple related news, broke through the shorter term exponential moving averages and it’s seemingly approaching the 200-period line. Last time it broke through the 200-days EMA, it was followed by an intensive and quick plummeting, so around 330 USD there is a potentially important price level. Currently we can see no reason to buy into these stocks. Concentration among shareholders, mainly institutional investors, increasing competition in the market, worsening profit growth outlook, and uncertainties in the markets in general are the main points to regard. Moreover, Netflix’s portfolio is far less diversified than their bitter rival HBO’s and the expected wide scale of services provided by the awaited market entry of Apple. On the short –and medium-term, if share prices keep on approaching 200-days EMA, and Apple-Comcast agreement can enter into a more developed stage, then events of late 2011 can happen again to Netflix shares.