Be Wary of Netflix, Inc. (NFLX)

Foolish conclusions

Netflix, Inc. (NASDAQ:NFLX)’s valuation multiples are drastically higher than those of its competitors, which is a cause for concern. Its revenue multiple is roughly 3.8, and its EBIT multiple is 32.5, both of which indicate that the stock is overvalued. Consequently, if Amazon continues to push Prime Instant Video and eats into Netflix’s market share, that could spell trouble. In that case, I’d expect to see a dramatic correction in Netflix’s stock price.

That possibility seems more and more likely as Amazon continues to acquire content that rivals Netflix’s. Amazon’s service is cheaper and offers more perks than Netflix’s, so expect customers to begin jumping ship. Netflix’s best bet is to hook consumers on exclusive content, but as Amazon wins more bidding wars that will be more and more difficult. Keep an eye on content deals—the more Amazon wins, the worse for Netflix. For now, I’d rate Netflix a hold, but if Amazon continues its charge, it’s time to get out. In the long term, it looks like Amazon will be a winner.

As for DreamWorks, it comes out a winner as well. It gets to establish itself as a television studio, and produce series on Netflix’s dime. The deal is in the books, and now DreamWorks gets to cash in. The company’s P/E ratio outpaces the industry average, and the multi-billion dollar content deal with Netflix, Inc. (NASDAQ:NFLX) should only boost it. Although it has a relatively small market cap, DreamWorks is a safe place to have your money. As it continues to diversify its revenue, it becomes a better bet.

Hunter Hillman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, DreamWorks Animation, and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Hunter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why You Should Be Wary of Netflix originally appeared on Fool.com and is written by Hunter Hillman.

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