Should Netflix Be Afraid of YouTube?

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NetflixGoogle's (GOOG) video-sharing site, YouTube, is giving Netflix (NFLX) investors a scare with its recent announcement that it has doubled the number of movie titles in its rental library to 6,000, on top of an already large number of free and paid titles. This raises the question: Will its strategy be successful enough that it can directly compete with Netflix?

Netflix is already attempting to fend off competitive threats from Apple's (AAPL) iTunes, Hulu and video-on-demand services from pay-TV providers like Comcast (CMCSA) and Time Warner Cable (TWC).

YouTube Has a Wider Reach

Compared to Netflix's approximate 23.6 million subscribers, YouTube's user count of close to 500 million points to a vast market opportunity. With its global reach, YouTube has an already established user base to which it can market its offerings.

... But Netflix's Business Model and Content Are Better

Netflix's content offerings trump YouTube currently: It entered the market earlier and offers both a higher quantity of offerings and a wider mix of titles. This is a key competitive advantage for now. In addition to streaming movies, the company offers streaming TV shows, and its allows its subscribers to rent DVDs for new movie titles. Netflix's video quality is also better than YouTube's.

We also believe that Netflix's fee-based model is better than the rent-per-use approach that YouTube is promoting. The pay-per-use system is similar to Apple's iTunes business, and we have seen Netflix's business grow at a much faster rate using its fee-based model. This seems to be a more attractive value proposition for users who plan to view multiple movies a month.

As such, we believe that YouTube's move adds greater pressure on Netflix for sure but is unlikely to impact Netflix's subscriber growth meaningfully in the near term. While we like Netflix's business model, we feel that from a valuation perspective its stock price is a little heady, and we maintain a $153 price estimate for Netflix, which is around 35% below the market price.

See our full analysis for Netflix's stock here.

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