Netflix Regains Its Stride

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As I glanced down at the major stock market averages this Monday, I couldn't help but notice they were all in the red. The general conclusion was that investors were doing some profit taking following an over-zealous stock buying spree in recent sessions. With all of this red on my screen, it was surprising to observe shares of content-streaming company Netflix (NASDAQ: NFLX) were not only in the green, but were trading higher by 3%.

If you consider the stock over the past 3 months, the gains are even more impressive. Netflix's stock has gained 76% since October and is showing little signs of slowing down.

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Another Month, Another Partnership

The catalyst behind Netflix's most recent gains point to a content partnership contract that the company inked with Warner Brothers Television Group. Netflix will retain exclusive rights to stream the 2012 and 2013 seasons of Warner Brothers TV content online. In its 3Q earnings conference call, Netflix executives noted that subscribers watched television content more than movie content but were quick to add that they were interested in growing in both markets.

The Time Warner agreement includes content for eight shows with the potential for additional programs.  'The Following,' featuring Kevin Bacon playing the role of  a federal agent, is included among the shows, in addition to Chuck, Fringe and the West Wing.

It's a big score for Netflix considering its biggest competitor -- HBO -- recently renewed its contract with Universal Pictures. In that deal, HBO, which is owned by Time Warner (NYSE: TWX), continues to own the exclusive rights to stream films from the studio behind 'E.T.' studio for another decade on its 'HBO Go' streaming on-demand offering service.

In yet another blow to Netflix, (NASDAQ: AMZN), whose stock just set a new record, teamed up with A&E Networks to gain the rights to streaming content from several channels for its Prime Instant Video service.  In addition to A&E, the licensing agreement extends to History, Lifetime and Bio channels. This gives Amazon the rights to shows such as Storage Wars and Dance Moms. Amazon says it has doubled the amount of streaming television and movie content since March.

Hindsight Is 20/20

In its 3Q 2012 quarter, Netflix said it still expects to have negative cash flow in the next several quarters as it continues to spend on original and licensed content. Eventually, it expects to attain positive free cash flow once again. In 2013, the company is focused on increasing its U.S. profits, making international investments and increasing its original content. 

The Time Warner television deal is said to be worth hundreds of millions of dollars, according to information learned by the Wall Street Journal. Last month, Netflix teamed up with Walt Disney for rights to stream films starting in 2016. As Netflix's 3Q 2012 letter to its shareholders explains, however, content liabilities increased in 2012 over 2011 levels, and that's not all.

For a stock that is trading with a trailing price-to-earnings ratio in the triple digits at about 125, Netflix has been making good use of its rear-view mirror. For instance, in the 1Q, Netflix predicted that for all of 2012 the company would have 7 million domestic net additions for streaming content. In fact, those results look to be closer to 5 million domestic net additions, and the company's management team attributes this to a market-forecast miss, not a performance miss. Had they known the true market opportunity in 2012, executives said in a recent conference call, they would have forecasted 5 million domestic net adds and everyone would have been happy.  

Netflix also had to move in reverse when they raised their subscription prices and lost subscribers in 2011, and remains in what it considers a 3-year brand-recovery plan. Thankfully the company doesn't have plans to change its $7.99 price point any time soon. Hopefully, when the three years are up we won't hear that Netflix actually should have called for a five-year image turnaround plan. I won't even touch on Hastings' infamous Facebook posting but there have been a series of missteps that the company seems to get a pass on.

There's no question that Netflix and the other streaming content providers are part of a sea change from traditional content viewership to a subscription-based model. It's a race to ink the next best content deal and the provider left standing will be the one that has the best shows and movies for the longest period of time. That still doesn't justify Netflix's recent stock price performance and it won't until the company's has steady and consecutive earnings and it becomes cash-flow positive. The prospects are amazing but Netflix has to translate its success with partnerships onto its balance sheet.

GerelynT has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and 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!

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