Has Netflix peaked?

WSJ latest to make case that Internet video sensation faces a harder road ahead

Ever since it seemed to reach critical mass earlier this year, online video-streaming and DVD rental company Netflix has been the target of naysayers, critics and envious rivals. No surprise. The Netflix narrative contains all of the elements that bring out haters -- overnight success, fawning media coverage, a skyrocketing stock price, and more fawning media coverage. (Also see: Defiant (yet respectful) Netflix CEO challenges shorts)

But that doesn't mean the haters can't be right, or that anyone who see problems with Netflix is a hater. After all, no business is perfect, or without challenges and dangers. Sure, Netflix is hitting on all cylinders now -- recent quarterly revenue and earnings growth topped 30 percent -- but it'd be unreasonable to expect that to continue indefinitely. That's essentially the argument made by the Wall Street Journal's Brett Arends. He takes a long look at Netflix and sees two main areas of concern: share value and competition. Shares of Netflix (NASDAQ: NFLX) are pricey, no doubt. On the last day of trading in 2009, Netflix shares closed at 55.09. They closed on Thursday at 185.35, more than triple the value of a year ago. Which gets to one of the points made by Arends -- Netflix shares are overpriced:

The stock is trading at a lofty 70 times recent earnings, and 48 times those forecast for the next 12 months. It trades at nearly five times annual sales. These are extremely high multiples.

Obviously he's right, but it does seem as if the market may be making an adjustment. Since peaking at 209.24 on Dec. 1, Netflix shares were down 13 percent through Thursday (and down another 77 cents, to 184.58, in early trading Friday). That being said, a look at Netflix's stock chart below shows strong overall growth with numerous shorter periods of decline. So it really is too early to tell if Netflix has hit its share ceiling or if it can regain upward momentum. Long term, of course, share price eventually correlates to financial and market performance. This, according to Arends, is where things could get rough for Netflix:

Yes, the big news is that the business is moving from delivering DVDs by mail, its established model, to streaming movies over the Internet.

Wall Street sees new vistas of growth. I see much more competition. I also see a game where Netflix's key strengths suddenly won't count for very much.

Noting that "everyone and his aunt is getting into the streaming game," he cites two companies you may have heard of -- Apple and Google, each of which offers video streaming services. Then this:

And where will Netflix have an advantage? Will they get better deals from movie studios and TV companies than Apple, Google, Hulu or Amazon? If so, why? If I want to download, say, "Harry Potter and the Deathly Hallows"—or "Casablanca"—why should I go to Netflix.com rather than anywhere else?

Legitimate questions for Netflix and its investors. When Blockbuster announced a few years back that it was getting into the DVD-mailing business, I thought that spelled trouble for Netflix. But Blockbuster had internal problems and couldn't beat Netflix at its game. Netflix's new competitors -- the cable companies, Apple, Google, Hulu, Amazon, YouTube, Vizio -- are many and formidable, most with far more resources to devote to favorable distribution deals, marketing and technical support. Do you think Netflix has peaked? Or does it have even better days ahead?

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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