Buy Netflix if You're too Scared of PCs
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX) shares were boosted by 1.61% at the end of last week because the company is going to be listed on the NASDAQ 100 index. Generally speaking, when a company is listed on a new index it increases the value of the stock because index-following funds will increase the amount of exposure they have to the stock.
The NASDAQ 100 represents the 100 largest non-financial companies by market capitalization. The stock will be officially listed on the NASDAQ 100 on June 6, and will be replacing Perrigo (a healthcare company).
I am hugely optimistic on Netflix
The company is successfully ramping up the number of its subscribers, and the company is on track to grow earnings as the contribution margin (marginal profit per unit) has gone up. The reason marginal profit per unit is going up is because Netflix’s movie streaming business is operating at even larger economies of scale. The company’s contribution margin has increased from 14.3% in the first quarter of 2012 to 20.6% in the first quarter of 2013. The growth of Netflix is contingent on the company’s ability to secure high quality content and win subscribers, which is something Netflix has done very successfully throughout the course of 2012.
The international expansion strategy is growing at a steady pace. The international streaming segment was able to add a million subscribers quarter over quarter, according to the latest earnings release. The $8 price point seems very effective in foreign markets.
Michael Dell moves the newsroom
Dell (NASDAQ: DELL) is still trying to convince shareholders to take Michael Dell’s deal. For whatever reason, the company seems heavily biased towards Michael.
Dell is on track to either being bought out or issuing a special one-time dividend, as both Carl Icahn and Michael Dell go head to head to come up with a deal that investors favor. In its latest press release the company is sticking with the $13.65 deal made by Michael Dell. The stock rallied by 25% since the announcement of the deal, and the management team feels that it has done its part in providing investors with a good deal.
I personally favor Carl Icahn’s special dividend proposal. The analysis is pretty long, but I assume that the combined value of the dividend and the floating stock price will amount to $18-$20 per share. To get a full understanding of this, I highly recommend you read my article that explains step by step what the special dividend means. I personally favor that deal because it has the potential of fully exploiting the maximum return possible for investors.
Hewlett-Packard still a compelling investment opportunity
Now I know many of you are thinking that the desktop computer is on its way to its coffin, but, on the other hand, we have to acknowledge the future potential of desktop computers over an even longer time frame.
Right now it seems that Dell may actually exit the market for computing devices in favor of its more lucrative software and enterprise business. In Microeconomic theory (under the assumption of perfect competition), the effects of an exit will involve a reduction in the production of goods and services along with an increase in the price. So for the remaining firms that are able to stick around (Apple, Lenovo, and Hewlett-Packard (NYSE: HPQ)) the average selling price of computers may actually go back up, but the total quantity of computer shipments will go down. It all comes down to which firms will exit and which stay.
Hewlett-Packard, in its most recent quarter, reported a 0.3% decline in year-over-year revenues (Non-Generally Accepted Accounting Principles), with cash flows from operations growing by 44% year-over-year. The company has been able to improve the amount of cash flow generated from its operations through cost-cutting practices. The cost-cutting resulted in a modest decline in revenues, but going forward it is highly likely that the revenue growth will stabilize. This is because the IDC estimates that computer shipments will stabilize and grow at around 1.9% worldwide from 2014 onwards.
The computer isn’t dead. The reason for this is that tablet and smart phone devices, while extremely cool, are not very work station friendly. Smartphones and tablets were designed to consume content but not necessarily to create content. You will never see a graphics designer hard at work in front of a tablet designing the next scene of a movie. I can also guarantee an architect will not drop a CAD (computer aided design) program into a tablet and get to work. Therefore it is highly likely that the computer will be here to stay. It is just a matter of time when there will be a floor underneath the market, but for now no one knows when that will happen.
For those that are patient enough, computers will most likely turn around. But if you can’t wait around for the coals to get warm in the desktop computer space, consider Netflix instead.
The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!