Netflix, Inc. (NFLX), Amazon.com, Inc. (AMZN): The Internet TV Race Is Heating Up

Netflix, Inc. (NASDAQ:NFLX) bagged the big cheese in kiddie TV and now Amazon.com, Inc. (NASDAQ:AMZN) has grabbed Nickelodeon’s preschool shows. Exclusive deals are heating up the race for share in Internet TV.

Picky, picky

When streaming video over the Internet was first getting started, Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) were in an arms race to have the most content. It only mattered how many hours of content was available. That helped spur adoption of the Internet as a video watching medium, but left both companies with content that was of little value.

Netflix, Inc. (NASDAQ:NFLX) has since begun to get picky. For example, the company’s first-quarter news release included this quote: “As we continue to focus on exclusive and curated content, our willingness to pay for non-exclusive, bulk content deals declines.” Netflix, Inc. (NASDAQ:NFLX) took a hard line with Viacom, Inc. (NASDAQ:VIAB) on this front, as it was willing to let a content deal expire over the ability to be selective about what it was getting.

Competition

With that as a backdrop, Viacom, Inc. (NASDAQ:VIAB) inked an exclusive deal for some of its Nickelodeon content with Amazon.com, Inc. (NASDAQ:AMZN). That bolsters Amazon.com, Inc. (NASDAQ:AMZN)’s place with the younger kid set. However, that’s not a major blow to Netflix, Inc. (NASDAQ:NFLX), which recently signed an exclusive deal with The Walt Disney Company (NYSE:DIS) for content.

These two deals show how intense the competition for content is getting. In fact, Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) are both creating their own content, too, in an attempt to differentiate their offerings. Investors, however, have to be careful in this arms race. Content is expensive and the content owners are the ones who are more likely to win than the ones distributing it.

Expensive stocks

For example, despite the increasing fight for content, Netflix’s trailing price to earnings ratio is over 500. Its forward P/E is in the 70 range. A company needs a lot of growth to support numbers like these. Although the top line has been advancing nicely in recent years, spending on growth led the bottom line to fall from over $4 a share in 2011 to about $0.30 in 2012.

If the company has to keep spending like that to support top line growth, the bottom line could be weak for years. With sky-high valuations, it won’t take much for investors to send the shares lower. Look to take some money off the table here.