Netflix, Inc. (NFLX)’s Pipedream Could Get You Value-Trapped

The iPhone, the iPad and Apple Inc. (NASDAQ:AAPL) TV could be good platforms for the iPhone maker to build an excellent subscriber base. Time Warner Cable Inc (NYSE:TWC), on the other hand, and its HBO unit will not sit around to watch Netflix serve 70% of the U.S market. On the global level, Netflix remains a small player, as the majority of its business is within the U.S. So how is Netflix even going to get 50% of U.S market? Even this would be mission impossible for the company. The company’s most recent quarter results indicate that it has 28 million U.S subscribers, and 36 million overall. With competition growing more than the company’s subscriber base, the future can only mean a decline in market share.

Netflix currently holds nearly 90% of the market share in video streaming industry. However, Hulu seems to be determined to take the fight to Netflix, and it continues to gain some market share. It share of the market is up 3 percentage points to 10% since last year. Hulu’s robust growth, a nearly 43% increase, signals Netflix’s vulnerability going forward. If the big guns in tech notice this and price their services competitively, Netflix’s market share could be well below 50% by the year 2020.

Performance and valuation

Netflix’s most recent quarter revenue grew by 18% as compared to Amazon’s 22%. Time Warner Cable Inc (NYSE:TWC)’s revenue, on the other hand, was up 6.6% year-over-year. Netflix’s gross margin stands at 27% compared to Amazon’s 25%. Its operating margin is pegged at 2%, just a percentage point above Amazon’s 1%, while Time Warner’s stands at 21%.

Netflix’s price to earnings growth ratio (PEG) stands at 7.99 times, above Amazon’s 5.84 and Time Warner’s 1.36. This is indicative of how investors are optimistic on Netflix, which is something that I would like to caution about based on the over expectations I’ve revealed.

The bottom line

Netflix sits well in the market, but that does not mean competitors would shy off of giving a shot at video streaming. As a result, the 50 million-subscriber base for the U.S market by 2020 is a big ask, even for a company like Netflix, Inc. (NASDAQ:NFLX).

The company’s profit margin of just 0.65% is worrisome, especially considering that its competition is building every year. Under the current valuation and price, shareholders may find it hard to report a significant return on investment from this stock.

The article Netflix’s Pipedream Could Get You Value-Trapped originally appeared on Fool.com and is written by Nicholas Kitonyi.

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

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