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Netflix, Not the Next Apple

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The following is a sample report of Sean's TechStrat Report that was written on April 3, 2013

During the recent "free trial" period, the stock generating the most reader questions was not Apple (NASDAQ:AAPL). It was Netflix (NASDAQ:NFLX). My view is NFLX is quite mixed. I was more in the Whitney Tilson camp (a bull) when the stock was $100 lower than the current print as I have always viewed NFLX as having a superior product with a strong lead in the field. Also, video delivery (esp. via any mobile device) is a massively viral area. On the other hand, one good quarter of earnings and a big short squeeze doesn't mean the stock is the next Apple, Google (NASDAQ:GOOG), or even Palo Alto Networks (NASDAQ:PANW).

What I don't like about NFLX, is that contrary to the bull thesis, there are no significant barriers to entry. In fact, I do not view the NFLX moat as wide at all. It's really a matter of other companies deciding to spend just a bit more money for content. Moreover, I'm very confident if not outright positive that either AAPL or GOOG or both will create content delivery services for video that will be "good enough" or even superior to what NFLX is currently doing. When that is evident, NFLX will be fighting for not just growth but its very survival. Back to that in a minute.

What I do like about NFLX is that again, they do have a big lead in how they package the service and how much content they provide. While this costs them a lot of money and future payment guarantees, it's also "The Thing" that the competition has thus far not been willing to match. Contrary to what many think, I find the company's moxy to pay the premium dollars for the content has given NFLX its decided edge. And in the future, if the content providers increase prices, then the initial deals NFLX cut could end up looking like the best deal in the world. The other bull case for NFLX would be as an acquisition target.

Back to NFLX' survival. On the other hand, if content prices hold or even fall, and if a few (or many) competitors can cut equal or favorable deals, then what NFLX has arranged previously loses a lot of premium value. What I see is a future world with AAPL TV streaming high-value content through it's own service, and/or GOOG Android devices streaming the "Play stream" and/or Amazon (NASDAQ:AMZN) streaming the "new AMZN Prime stream" etc. etc... Thus when one views the landscape with this lens, they get the picture pretty quickly that the NFLX moat can be crossed with a very short bridge.

With regard to AAPL, I'm nearly certain that the new TV will not only come with gesture/touch based controls as I first described well over a year ago (see my report on Apple TV) but more importantly, AAPL TV could likely come with a new video streaming and content delivery powered by my predicted "media content search" capability. And the day this happens, I personally would not want to be long NFLX stock and in fact, I plan on being short the name.

The bottom line, NFLX has a great service for a great price and what looks like a strong lead. But I don't view that lead (or moat) being nearly as large as many of the bulls currently believe. And we might only be a few months away from seeing a true platform competitor for NFLX.

Twitter: @UdallTechStrat

The TechStrat Report by Sean Udall. Sean provides in-depth analysis, strategies and trades across the technology sector. Take a FREE 14 day trial.
POSITION:  Position in AAPL,GOOG, Possible Future Short in NFLX