Editor's Note: Featured on Saturday April 23, 2011 as a Blast from the Past pick.
I have been agonizing lately over NFLX. I have been a fan of the stock for years, since I signed up for the service itself. And my interest in it began to really take off when I was involved with their Netflix Prize contest. (Which was a brilliant marketing strategy: offer $1 mil to any team who could improve their recommendations algorithm by 10%.)
I have been wondering lately if I have missed all the upside. If you look at the chart, and you take into account the past, it would seem at first that this stock is headed back down to $55 or so. And it might be. But I think there is a better chance that this stock has turned a corner and has gone from little-known stock (well-known company) to hugely popular Wall St. darling (think AAPL).
The latest earnings release seems to have woken the world up to the fact that this is a very well run, very profitable business. In terms of upside though I believe that there are still enough people who are skeptical of NFLX, generally because of the emerging popularity of streaming video, that the current price does not fully reflect their potential. The trailing P/E as of this writing is only 33. That may sound high but if we were to come up with a leading P/E based on projected results, I think we'd find that the stock is somewhat cheap, considering the potential growth.
Let's address the streaming issue. First, they are already doing it. The latest piece of the puzzle was to let people with PS3s stream. The only downside is that they only do streaming on certain movies, and they tend to not be the movies you want to watch. However they are building the infrastructure and associating themselves with the technology.
There are a lot of good arguments that can be made about how the cable companies are better positioned to take over streaming. And the movie companies are doing their best to try to dictate the terms (and prices) of streaming video. If you look at the prices of things on iTunes they are outrageous.
Anyway there are plenty of competitors, but here's the thing. Netflix has the brand. They have carefully, and quietly, crafted one of the strongest consumer brands in the United States. I have never heard any 'horror stories' about Netflix, it seems to me that everyone who has Netflix loves it.
Additionally they have a fantastic website which makes it easy to choose movies which should not be ignored. There are a million movies out there; besides the most recent blockbusters, how is a person to decide what to watch?
Well Netflix of course lets your browse and search by actor or director, and as many people know it recommends movies to you. They also have been toying with the social networking angle, which seems fairly obvious but is nonetheless crucial. By adding a social dimension they will cement their brand loyalty; once you've put in a lot of time into writing reviews, adding your 'friends' etc you won't want to cancel the service.
And this is a company that makes money hand over fist. The most recent earnings release...
Online DVD rental pioneer Netflix Inc. said Thursday that its third-quarter profit rose 48% on greater subscriptions to its services, with the company raising its subscriber and revenue forecasts for the fourth quarter and full year.
seemed to be the catalyst for the latest sharp move above $50. I think it's especially bullish that the earnings pop played out not just immediately after the earnings but over the next few weeks. Additionally, today is a down day for the market but NFLX is hardly down at all, it dipped below 60 and buying pressure has brought it back to 60. So the signs are pointing to 60 being a new floor. In reality it will probably make 59 the new floor, but either way, strong buy.