I Was Right 6 Months ago, But for All the Wrong Reasons

By Jason Hall - January 7, 2013 | Tickers: AMZN, CSTR, MSFT, NFLX, VZ | 0 Comments

• Email
• Print

Back in August I wrote this long-winded article claiming that Netflix (NASDAQ: NFLX) will continue to be a dominant player in the delivery of TV and movie content to the home.  Let's take a look at how the stock prices of the companies I mentioned have performed in the six months since:

NFLX data by YCharts

At the time of publication, Netflix was near its 52-week low, and there was plenty of uncertainty about the future.  Factor in the deep pockets of Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT), and there were plenty of reasons to expect that Netflix's best days were in the rear-view mirror.  But expectations and results, at least in the short term, can be very different things, as the 78% increase in Netflix's share price in the meantime shows us. 

Here's a summary of events that moved Netflix's share price since last summer:

Forbes, Oct. 9, Reed Hastings' stepping down from Microsoft board of directors:

"Microsoft has mountains of cash, and might be looking for a more aggressive position in online content; Netflix has a market cap of just $3.6 billion, and more than 27 million subscribers, which makes it the biggest streaming video service in the known universe."

The Wrap, Oct. 23, regarding mixed Q3 earnings report, and shares drop 15%:

"The company once said it would add 7 million domestic customers this year, but had only added 2.1 million entering the quarter. This month's haul brings the total to 3.26 million, meaning Netflix will need a huge holiday push to meet its target."

More from Forbes, Oct. 26, regarding the Microsoft acquisition rumor, pushing shares higher:

"Meanwhile, buying Netflix would be in keeping with Microsoft’s revamped philosophy on the Xbox 360, which treats the device more like an entertainment device and less like a video game console. I’d note that Microsoft has a track record here on shopping for Web brands: They paid $8.5 billion for Skype; and of course they tried in vain to buy Yahoo a few years back for an ungodly sum."

More from Forbes, Oct. 31, following the announcement by corporate takeover specialist Carl Icahn holding more than a 10% stake in Netflix shares and options, leading many to speculate he would push for Netflix to put itself up for sale, again sending shares higher:

"'Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the Internet, mobile, and traditional industry,' the filing says, though it goes on to say that Icahn has 'reached no conclusion,' about how Netflix can maximize shareholder value."

 CNN Money, Netflix announces "poison pill," share price rises.  Icahn calls the plan "particularly troubling." From the article:

"Icahn lashed back Monday afternoon, saying that 'any poison pill without a shareholder vote is an example of poor corporate governance.' He called the 10% threshold 'remarkably low,' 'discriminatory,' and 'particularly troubling.' He also said that he believes Netflix's board holds too much sway over shareholders in general."

 The Hollywood Reporter, Dec. 7, Netflix and Disney reach agreement on content licensing deal that sent ripples throughout the entertainment industry, and the share price sharply up: 

"Davenport & Co. analyst Michael Morris highlighted that the arrangement cuts out a traditional premium TV service carried by pay TV operators to provide content to an online service. 'Disney makes the call that a stronger Netflix will not disproportionately fuel cord cutting, monetization of library film content will have to be bolstered by a streaming partner and traditional pay TV output deals are now the domain of streaming providers in addition to premium networks (HBO, Showtime, Starz),' he said."

Buy the rumor, sell the news, right? 

That was clearly the case in late 2012, with the notable exception of the Disney agreement (which even carried rumors of a Netflix takeover by the House of Mouse.)  I can promise you I didn't see a series of buyout rumors buoying the stock to nearly a double. And the only "news" in the form of a mixed Q3 earnings report, sending shares down.  Strange things, these short-term occurrences.

I can think of few better ways to sum up the stock's perfomance than to quote Macbeth, or "the Scottish Play" as those of us more superstitious may refer to it, "...it is a tale told by an idiot, full of sound and fury, signifying nothing."  Well, nothing except that 78% share price increase...

So that's Netflix.  What's happened with the competition?

Interestingly enough, very little, not even any sound and fury (although there are probably some Apple shareholders that would disagree about the "fury" part.) 

Amazon has added some new content, but is still spending much of its earnings on growing its core business through expanded distribution capacity.  Back in November, the company began testing a monthly option, but within a few weeks was no longer signing up members for the monthly option.  All indications are that Amazon is content to add programming at a moderate rate, and continue to offer free streaming as an added value to Prime shipping members. 

Microsoft and Apple have been nearly silent in regards to Netflix-style streaming, besides the rumors that Microsoft was going to buy Netflix.  Microsoft notably has bigger concerns, with the combined decline of the traditional PC market, and a well-publicized struggle to gain traction in mobile computing. Apple, on the other hand, appears to be firing on all cylinders, despite the market's attempts to make that look like a small-"f" foolish statement.  But the fact remains, neither company has given any indication that there are any plans to expand into the streaming-buffet business. 

The biggest competitive news is that Coinstar (NASDAQ: CSTR) subsidiary Redbox, and partner Verizon (NYSE: VZ) ​have finally managed to get their streaming offering into beta.  And at $8 per month including four nights of movies from a Redbox kiosk, the pricing is very compelling.  The questions are, when will it be open to the public, and will there be enough content to be relevant? 

Only time will tell, but I think that Verizon (either with or without Redbox) will thrive, right alongside a thriving Netflix. 

Okay, so really, not much has changed besides some new competition. 

Honestly, that's right on the money.  Netflix has continued to use cash flow to expand, hold tight until new markets become profitable, and then repeat.  Essentially, the company continues to execute in the manner that management has been promising, and the results have been in line with what we were promised.  Frankly, those results haven't earned the 78% share price return that the rumors have given us, but one shouldn't complain about great results for unexpected reasons. 

Importantly, my original article wasn't about seeing a big short-term return in the share price -- it was about the larger trend of streaming content.  The Disney agreement is probably the biggest validation to that point that I can think of.  Well that, and the net 3+ million subscribers that Netflix has added over the past year, despite the loss of around 2 million DVD subs. 

Foolish final thought?

The streaming trend continues to gain momentum, and the fact that Verizon is willing to risk cannibalizing its cable subscribers to get a piece of the action is just another indicator that this burgeoning shift will continue.  Netflix killed the video store, and now cable is dying.  The real question is whether or not any of the traditional cable providers, besides Verizon, are willing to make the shift to stay relevant in an ever-streaming world, or will they go the way of Blockbuster? Tell me what you think in the comments below. 

• Email
• Print
• Feedback