April 23, 2008
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I wrote about my short thesis on Netflix (NFLX) just about ten days ago. The company just the other day reported growing earnings but disappointed with a weak outlook. The stock fell a whopping 24% as investors ran for the exits. The market responded negatively to the increase R&D costs for developing streaming technology that would allow the company to deliver long-form digital video content over the Internet. These recent expenses have slowed down profit growth and promise to weigh on foreseeable future earnings.
My short thesis was based on the potential for developing technologies from obscure upstarts to steal market share from Netflix and competitor Blockbuster (BBI). I also reasoned that Comcast (CMCSA) is really the company, however hated cable companies might be from a customer service point of view, that has the greatest chance of success in the battle for the future of digital video distribution.
For any chance that Netflix stands to survive the creative destruction of innovation, the company indeed needs to be spending more money developing next generation technology for content distribution. The market’s shortsightedness is punishing the company for the one thing it should absolutely be doing to ensure long-term survival. The only other way for it to acquire the technology to survive is to buy it from technology startups that are actively trying to address the digital content distribution problem.
So although my trade is working, the reason for the stock’s drop is not what I posited. Long term, I stand by my short on Netflix and Blockbuster, their valuations are currently too high once their competitive advantages are eroded by new technologies.
Tag: blockbuster