Can Netflix Reach $300 Again?

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

Back in the summer of 2011 Netflix (NASDAQ: NFLX) was king, and the stock was trading above a peak of $300.  But in July Netflix announced they were going to unbundle their streaming and DVD rental service charging and would charge more to rent DVD’s. Customers responded by dropping the service in droves with over 800,000 customers unsubscribing. The story of the downfall of Netflix continued as they tried to separate the DVD and streaming by creating Quickster, the DVD rental service. Howeve, that couldn't last much longer than a week and the public lost faith. Netflix went from a $300 stock to a $50 stock in just over a year. With increasing competition, will Netflix be able to climb back up to $300?

Reasons to be Bearish on Netflix
-Streaming subscriptions will not be as profitable as DVD rentals. At its peak in 2004 DVD profit per sub was at $26, while streaming was only $10 per month.
-Price raises have proved to be elastic, as evident by the 800,000 customers they lost in 2011.
-EPS growth in the past three years has declined 11%.
-Cash flow has decreased for every quarter of 2012.
-Netflix’s control over the DVD rental market has declined over the past few years.
-Content providers have been increasing the cost for Netflix to have exclusive rights to their shows and movies.
-More companies are starting to compete for content rights.

The Competition
-Amazon (NASDAQ: AMZN) has been one of the biggest competitors to Netflix.  Amazon's membership service “Amazon Prime” offers their members access to watch movies and shows online, similar to Netflix's service. They have been rapidly adding content since they introduced the service in February of 2011, and Amazon has reached agreements with providers like NBC Universal and CBS. Amazon Prime, however, is not just a streaming service; they provide better shipping deals and special offers, and it only cost $79 dollars a year.

-Hulu, arguably the biggest competitor of Netflix, is a joint venture by NBC Universal, Fox, Disney-ABC Television Group, and Providence Equity Partners. Hulu offers free on-demand streaming videos, as well as subscription-based premium content. Hulu has content deals with NBC Universal, ABC, Lionsgate ABC, Sony, and Time Warner, among others. Hulu is a cheaper option to Netflix that only costs $7.99 a month. The company has gained approximately 1.5 million Hulu plus subscribers in its only 2 years of existence.

-Redbox, the DVD, Blu-ray, and video game renting kiosk, is not currently in competition in the streaming business but has started to dominate the DVD rental market. A subsidiary of Coinstar (NASDAQ: OUTR), Redbox made up 44% of the DVD rental market as of 2012, increasing from 27% in 2010; meanwhile Netflix has decreased from 34% in 2010 to 27% in 2012. Redbox announced in July 2012 that they were testing for their new service Redbox Instant, an online streaming service for which they've already have made deals with Lionsgate, NBC Universal, Paramount Pictures, and others.

Why You Should be Bullish on Netflix
-Despite all the bad press Netflix has received from the Quickster failure, the management team was able to make Netflix the dominating force in the streaming market. They also have been able to move Netflix outside of the US while securing exclusive content rights from content providers, which have proved to not be the most willing to give away content rights.
-Netflix has the largest selection of DVD titles at 200,000 and the largest streaming selection with 60,000 titles.
-Netflix just recently reached a deal with Disney that gives them access to a larger library of content.
-Netflix in 2010 expanded into Canada and has started to turn a profit. Expansions in 2012 included the UK and Ireland, adding around 1 million more subscribers.
-Netflix has over 25 million users currently, the largest of the streaming networks

My conclusion
Netflix is the most recognized brand in the streaming business. Even though they are losing their share of the market of DVD rentals, they have the largest subscription base of movie streaming. This large sub base gives them more capital to buy more content rights, which in turn will give them more subscribers. Compared to their high of $300, buying Netflix now at $99 is a good value. Whether or not they can climb all they way back up to that earlier stock price is not clear, but even climbing to half of that price is still a good return. The loss of 800,000 members has driven the price down, but slowly some of those lost members will come back. Netflix is the leading company in the business they innovated, and although they will lose the battle in the DVD rental business, they have a lead and the upper edge to be a good play for the streaming entertainment market.

Update

Netflix beat Q4 earnings, destroying the analyst expected 0.13 EPS loss by posting a 0.13 EPS profit. Shares of the company soared over 40% in one day for their biggest daily gain ever. Netflix says they added 2 million streaming subscribers in the US and another 1.8 million subscribers abroad.



Hjcranford has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com 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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