Could This Be The End Of Netflix?

Netflix remote

Photo: Netflix

If Amazon has anything to say about it, it very well could be.Amazon announced today it purchased Lovefilm, which is the European equivalent of Netflix.

Amazon already owned 42% of the company, so it made sense for Amazon to pony up the rest of the cash to purchase it.

The number being thrown around is $200 million, though Amazon did not disclose a purchase price.

Netflix has long talked about launching a service in Europe, with both a physical DVD rental, as well as a digital streaming ability. Lovefilm already has this, and is well known in Europe, whereas Netflix isn’t. If Netflix can’t grow abroad, then shares are going to get seriously hurt, as it’s trading around 70 times 2011 earnings, and one misstep will kill shares.

Whitney Tilson, of T2 Partners talked about why he is short Netflix, and it’s because of valuation. He admitted he’s been wrong for the past 100 points or so, as shares skyrocketed in 2010. He put out a letter on Seeking Alpha discussing his reasons for the short and why he thinks shares will come down.

Reed Hastings, CEO of Netflix, responding a couple of days later, essentially imploring Tilson to cover his shares. Hastings and Tilson are friends, and it seemed like Hastings was telling Tilson to cover because he didn’t want to see him get hurt. When a CEO responds to short sellers, there is something wrong there, friend or not. It’s not the CEO’s job to hand feed short sellers.

This is something we’re going to see play out over 2011, and it will be one of the year’s biggest stories, should Netflix falter.

Personally, I believe shares of Netflix are overvalued and have been for the past 50 points or so. Ever since the company joined the S&P 500, other investors have echoed these sentiments, sending shares down some 7%.

All eyes will be on Netflix when it reports first quarter earnings. All you need is one metric to not beat expectations, and shares will crumble like a house cards.

Disclosure: no position in names mentioned.

— Roger Nachman

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