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I happened to come across an article yesterday about a delay in the Netflix lawsuit settlement and it was quite an eye opener. Not only was Netflix delaying delivery of popular movies to “heavy-using customers” but when it got sued over this practice, the settlement it reached in the class-action lawsuit is a promotional gimmick for Netflix. This explains why The Motorcycle Diaries and March of the Penguins sat at the top of my Netflix queue for weeks with a “long wait” status. I finally decided to just stop by the local Blockbuster to rent a copy of March of the Penguins.
The Netflix (NFLX) stock does look extremely overvalued given its current P/E of 176.28, but when you look at its forward P/E of 31.95 and P/S of 2.2 it almost appears undervalued given its high rate of growth. Obviously tons of people love their service and they still have a lot of potential to expand. With Walmart exiting the online DVD rental business and Amazon.com not starting its online DVD rental service in the US like it has in Europe, Netflix has benefited a lot. There is certainly pricing pressure from Blockbuster’s (BBI) $14.99/month online rental service. Blockbuster is clearly loosing its shorts (and shirt) over this price war and this is evident in its $3.86 stock price. Instead of pursuing an acquisition of Hollywood Videos, Blockbuster should have tried to acquire Netflix. There is some speculation that Amazon.com (AMZN) might consider acquiring Netflix. That would create a powerful combination and bode very well for Netflix shareholders.
Full Disclosure: I currently do not own any positions in Netflix, Amazon.com, Blockbuster or Walmart.