Netflix Stock: The Floodwaters Are Finally Starting to Rise on NFLX

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When it rains on Netflix (NFLX), it pours. At least, that’s the way it seems this week.

The Floodwaters Are Finally Starting to Rise on Netflix Stock On Tuesday, Netflix stock lost more than 8% of its value on a double dose of news that its competitors were stepping up their game. Then on Wednesday, when most investors figured the worst was over, shareholders of NFLX stock got more bad news as yet another player announced it is poised to chip away at the on-demand-video company’s market share.

Thing is, the headwinds that surfaced this week are neither minor nor surprising. They’ve been brewing for a while, and they aren’t something the company can simply brush off or overwhelm (even if Netflix stock holders attempt to dismiss them).

Indeed, these headwinds expose perhaps the biggest flaw in the NFLX business model, and though they won’t upend the company anytime soon, they will gnaw at the value of Netflix stock in perpetuity.

Hulu Follows the Rest

Wednesday’s fractional stumble came on the heels of news that rival video-on-demand name Hulu was unveiling an ad-free service at a price of $11.99 per month.

Hulu already offered a service with limited ads at a monthly price of $7.99, right in line with Netflix’s $7.99-per-month subscription cost. But it was still no comparison, as Netflix not only had a much more substantial selection of content, but it also never imposed advertisements on subscribers.

Truth be told, the new Hulu option still isn’t a real threat to Netflix … at least not yet. It does, however, put Hulu one step closer to becoming a viable threat. Another price drop here, a few more shows or movies there, and all of a sudden, consumers may start to do some serious competitive shopping.

The Hulu news came a day after owners of Netflix stock learned that Amazon (AMZN), arguably Netflix’s biggest direct rival, was adding some serious value to its Amazon Prime service. That value? Unlike with Netflix, Amazon Prime members can now download digital content and replay it a later time, offline.

Wednesday’s Amazon news followed reports that Apple (AAPL) was also looking into the content-creation game, taking a direct shot at Netflix’s award-winning original and exclusive programs like Orange Is the New Black and House of Cards. Although details were scant, the obvious natural progression of such a move would be to use it as part of a service that competes with Netflix.

Where Apple differentiates itself from Netflix is that it owns the hardware that such a service would work with, and it will soon be able to seamlessly pair such a service with a “light” cable-television package that may draw back some former cord-cutters.

But why should NFLX investors worry? After all, it’s entrenched, and users are relatively loyal.

To be fair, none of these things in and of themselves will topple Netflix in the immediate future. All of them in sum, though — and all the other similar on-demand services that will surface in the meantime — will serve to commoditize the on-demand video business.

And that’s what owners of Netflix stock should fear the most — commoditization of the video-on-demand industry will subdue Netflix’s best (and only?) weapon, which is being the biggest VOD provider by virtue of being the first. Hulu likely won’t make a big dent on that front, though between Apple and, to a slightly lesser degree, Amazon, consumers will have some tough choices to make that could have Netflix playing second fiddle in the foreseeable future.

Bottom Line

In retrospect, what seemed like a questionable idea just a few years ago, when Netflix first offered a quirky little DVD swap-out service, turned out to be brilliant. Equally brilliant was the migration to an online-delivery format. It was so brilliant and so lucrative, in fact, that other players wanted to jump into the game.

Fortunately for Netflix stock holders, the company had enough of a lead to fend off most newcomers for a long while.

Unfortunately for those still holding NFLX, with no real barriers to entry, competitors are finally getting up to speed.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/netflix-stock-nflx-floodwaters/.

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