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Will Amazon Or Apple Buy Netflix?

Posted on Monday, May 3rd 2010

According to MasterCard Advisors’ SpendingPulse, online spending grew 18% over the year in March, outpacing the growth rate of traditional brick-and-mortar stores. Online retailers Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) also saw significant growth in their revenues. Amazon’s stock touched a record high, and recent quarter results surpassed market expectations, recording double-digit revenue and earnings growth. But the company is in for some serious competition over its Kindle. It is not just Barnes & Noble’s Nook that has eaten into Kindle’s market share; Apple’s iPad is also becoming a force to reckon with.

Amazon ended its first quarter with revenues of $7.13 billion, recording growth of 46% over the year and beating the market’s projected $6.87 billion. EPS of $0.66 was also higher than the Street’s projected $0.61 and the previous year’s $0.41. By segment, Electronics and General Merchandise (EGM) segment revenues finally outgrew Media revenues. For the quarter, worldwide media sales grew 26% to $3.43 billion while EGM segment revenues of $3.51 billion grew 72%. As giants such as Apple and Google enter the digital media space with their offerings, Amazon will no doubt be pleased with the growth in the EGM segment. For the quarter, International sales grew 45% to $3.35 billion, while North America sales grew 47% to $3.78 billion.

Kindle remained Amazon’s leading product and now boasts of 500,000 titles. Amazon recently launched brick-and-mortar sales for Kindle: The device will be available at select Target stores for $259. Many believe that the retail model was necessitated by the growing popularity of other readers, primarily the Nook and the iPad, both of which are available at Best Buy. The iPad has already sold more than half a million units since its launch earlier this month.

While Amazon still did not divulge the number of Kindle units sold, analysts estimate that during the quarter, Nook overtook Kindle sales. For Q1, analysts estimate global e-reader device sales to be 1.43 million units. Sales are expected to grow to 2.02 million units in Q2. By the end of the year, worldwide e-reader sales are estimated at 11.40 million units compared with 3.82 million units sold last year. In Q1, Nook took the majority share and claimed 53% of the readers shipped to U.S. vendors.

Amazon projects revenues of $6.1 billion–$6.7 billion compared with analyst projections of $6.43 billion. However, the company missed on earning expectations. Amazon expects operating margin to be in the range of 3.6%–4.8% compared with Wall Street estimates of 5.1%.

The stock is trading at $141.79 with a market capitalization of $61.8 billion. It touched a record high of $151.09 earlier this month.

Meanwhile, Amazon’s competitor eBay seems to be taking big steps to rev up its performance. Q1 revenues of $2.2 billion grew 18% over the year and exceeded the market’s projected $2.18 billion. EPS of $0.42 was a penny higher than the market’s projected $0.41.

Marketplace revenues of $1.4 billion grew 13% over the year and PayPal revenues grew 26% over the year to $0.81 billion. Total gross merchandise volume grew 24% over the year to $13.4 billion. However, U.S. gross merchandise volume (GMV), excluding vehicle sales, grew only 6% for the quarter.

EBay is normally thought of as a site that deals in secondhand goods. To give its image a face lift, the company launched a fashion microsite to compete with the likes of Gilt.com and Ruelala.com by offering trendy clothes and accessories at big discounts. It is working with fashion brands and retailers such as Hugo Boss and Lord & Taylor to sell products through gallery-style photographs; an improved search engine will make it easier to browse. EBay is also partnering with some of these brands to create an online outlet mall. It is hoping to roll out these new selling formats to other retail categories as well.

EBay is also replacing is old classifieds site, Kijiji.com, in the United States; while the site has done well in Canada and Australia, it has not been able to compete with craigslist. Craigslist boasts of nearly 4.9 million users compared with Kijiji’s 1.8 million. The new site will help to simplify search for items and will have an improved filtering of ads and seller profiles. EBay also introduced mobile applications for listing and selling items for sale and for posting or searching classifieds for the iPad.

PayPal saw 38% growth in volumes in Asia last year and is now focusing on growth in the region. The company is looking to double its headcount in Asia and is making significant progress in China. The Chinese e-commerce market is expected to be worth $220 million for the year. EBay has tied up with China UnionPay Co., which is China’s largest electronic payment group, to enable Chinese consumers to purchase from overseas merchants using PayPal. Its main rival in the region, Alibaba.com, also tied up with eBay to offer PayPal’s e-payment services on its new wholesale site, AliExpress.

PayPal is also tying up with financial institutions and other e-players such as Facebook, which will begin accepting payments for ads and virtual goods via PayPal. PayPal will also be a payment option for Facebook Credits, which can be used to buy virtual goods on Facebook. PayPal’s other agreements with Singapore’s largest bank, DBS, and First National Bank in South Africa will enable more consumers to use PayPal online.

Mobile remained a focus of innovation for eBay. The main eBay shopping application has recorded over 8.5 million downloads. The company expects mobile apps to generate $1.5 billion in GMV in 2010, registering 250% growth over the year. It is continually releasing new applications for both eBay and PayPal.

In the current quarter, eBay made several changes to its fee structure and listing rules. The new structure is expected to lower or remove up-front listing fees, and eBay will be making up the difference through the commission it gets when an item sells.

The company expects EPS of $0.37–$0.39 in the current quarter on revenues of $2.15 billion–$2.20 billion. Analysts were looking for EPS of $0.40 on revenues of $2.2 billion.

Now that eBay seems to be emphasizing clothing, it should seriously consider acquiring FigLeaves.com.

EBay’s stock is trading at $24.04 with a market capitalization of $31.3 billion. It touched a 52-week high of $28.37 earlier last month.

Netflix (NASDAQ:NFLX) is another e-commerce player that is having a good stock run. Its stock crossed the $100 mark for the first time ever, and the rise doesn’t seem to be slowing.

Q1 revenues of $493.7 million recorded impressive 25% growth and met the market’s expectations. EPS for the quarter stood at $0.59 compared with the previous year’s $0.37 and the market’s projected $0.58. Netflix added 1.7 million subscribers during the quarter, growing at 35% over the year and 14% over the quarter, ending with 14 million subscribers.

Netflix is seeing significant growth in online streaming of content. During the quarter, 55% of its subscribers streamed more than 15 minutes of online content, compared with 36% a year ago and 48% a quarter ago. This was the first quarter in which online streaming of content held a bigger share than DVD rentals.

Netflix expects the strong growth to continue. It projects another 700,000 to 1 million customers to join in during the current quarter. For the current quarter, it projects revenues of $517 million–$525 million with EPS of $0.62–$0.73. For the year, it expects revenues of $2.11 billion–$2.16 billion with EPS of $2.52.

During the quarter, Netflix has had to give in to major studios to delay the release of titles for rent in exchange for additional streaming rights. Netflix customers now need to wait 28 days after the DVD is released to be able to rent a movie. But the delay doesn’t seem to be affecting customer turnover. For the current quarter, Netflix had its lowest cancellation rate ever of 3.8%.

The company now has streaming access on all major game consoles that are available in the market. It finally added Nintendo’s Wii to its existing agreements with Microsoft’s Xbox, Sony’s PlayStation, and TiVo.

With major competitor Blockbuster struggling to stay afloat and RedBox still building its streaming content, Netflix is a sure winner in the market. It not only have ties with the gaming console industry, but also with consumer electronics manufacturers for most Blu-ray, DVD players, and set-top boxes available today, creating high barriers to entry. And it’s not stopping there: Netflix launched a free application for the iPad that lets subscribers stream content on the newly launched tablet at no additional cost. Netflix is also working on streaming applications for both the iPhone and the iPod Touch.

Further, as online streaming grows, Netflix should be able to gain growth from international locations. The stock is currently trading at $101.49, taking its market capitalization to $5.3 billion. It touched record high of $109.70 earlier this year.

Even though I have said before that Amazon is likely to eventually acquire Netflix, a new possibility has emerged with the Apple iPad. Netflix could very well become the iTunes store for Apple in the film and video category. With Apple’s seemingly limitless profits, a $5 billion–$6 billion acquisition is a no-brainer when the synergies are so strong.

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[…] Posted on May 4, 2010 by vinay yerramilli Going off Sarmana Mitra’s excellent analysis on Netfilx as a target for Amazon.com or Apple…I certainly think Netflix is a much better […]

Amazon should acquire Netflix | What is the people story? Monday, May 3, 2010 at 9:44 PM PT