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Netflix: Where's the moat? Add to ...

When Warren Buffett, chief executive of Berkshire Hathaway Inc., said recently that he was on the prowl for a large acquisition, Netflix Inc. probably didn't make many lists of potential targets. That's because Mr. Buffett is famous for preferring companies that have natural moats around their businesses - barriers that prevent newcomers from nibbling away at their relevance - and it seems that Netflix has no moat whatsoever.

At least, that's what investors seem to believe right now. Netflix is the movie distribution company that recently stormed into online movie delivery, sending its red-hot stock to a record high of $247.55 (U.S.) in mid-February. At that time, its shares were valued at nearly 80-times earnings - an astronomically high valuation that made the stock look priced to perfection.

Since then, though, investors have become worried that this perfection doesn't necessarily include a level of protection from new competitors. The share price sputtered in late February when Amazon.com Inc. announced that it would launch a video streaming business to compete with Netflix.

On Tuesday, Netflix shares dipped another 5.8 per cent after Warner Brothers - a division of Time Warner Inc. - announced that it will offer movies to consumers through Facebook Inc., which boasts 500 million active users.

As an analyst at Goldman Sachs noted, the Warner Brothers development isn't necessarily a direct threat to Netflix at this point because it goes after consumers using computers rather than televisions. Longer term, though, the new service could be a threat.

Clearly, Netflix investors aren't willing to stick around to find out. The shares have now stumbled 21 per cent from their record high in mid-February, after gaining 290 per cent over the previous 12 months. With no clear moat surrounding its business model, investors are starting to think twice about the stock's valuation.

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