Will "Binge Viewing" take Netflix to $130 a Share?
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At $7.99 a month for the basic package, NetFlix (NASDAQ: NFLX) has introduced "Binge Viewing" into the entertainment industry.
While "Binge Viewing," marathon sessions of watching a television show such as "Breaking Bad" one episode after another and one season after another, has altered the entertainment industry and the way shows are written, it has also restructured the appeal of NetFlix stock to investors. Year to date, NetFlix is up by 22.53%. The last month has seen a 35.13% increase in the share price.
"Bing Viewing," was described in one article as, "For middlemen like Amazon Instant Video, Hulu Plus and NetFlix, it's a godsend, boosting their quest to attract and retain subscribers." As a result, on a quarterly basis, sales growth is up by 21.05% for NetFlix. Usage for Netflix, total viewing hours, was robust for June with a record more than 1 billion hours' worth of streaming video being piped out to its customers. Competition from Amazon (NASDAQ: AMZN), Wal-Mart (NYSE: WMT) and Apple (NASDAQ: AAPL) have not reached the levels anticipated by many, as evinced by the recovery from the 70.38% drop in the share price, most of it self-inflcited, over the last year of market action for NetFlix.
In addition to the increase in sales growth and usage, NetFlix members have been spending more time watching programs until the end. As an example, more than 70% of viewers finish every episode of "Breaking Bad." For NetFlix, the main revenue source is still the subscription fees, so the loyalty and the dedication to task of those who take to "Binge Viewing" is very bullish for the stock.
According to one article about Netflix, "Its value is very straightforward to calculate based on the number of subscribers. By March 31, 2012, it has about 9.96 million DVD subscribers and 22.02 million online subscribers - that's approximately $3.5 billion a year in revenue. At a 10% profit margin, and a price/earnings (P/E) multiple of 10-15, it is worth $3.5-$5 billion....Therefore, if Netflix can maintain its subscriber base and margin, its shares are most likely to swing between $65 and $95. To be a little more conservative on the top price range, we can adjust that to around $105."
At present, NetFlix is trading around $85 a share. But there has been massive insider buying by Jay Hoag, a director. Mr. Hoag, in early May, bought over 25 million shares of NetFlix at prices ranging from $71.20 to $73.06. On April 6, Richard Barton, another director, bought 6000 shares at $85.05. Insiders only buy for one reason: they expect the share price of the company's stock to rise.
NetFlix is a seasonal stock. The subscriber base has increased in the third and fourth quarter in previous years. This is due to a variety of factors: new shows starting in the Fall, families returning from vacation, holiday gift buying and catching up on movies released earlier in the year.
But there are concerns by some if NetFlix can sustain its recent gains. Utilizing a Google search method that reported increases in subscribers for NetFlix before, one analyst notes that, "Based on the search index during the same quarter last year and during the previous quarter, search volume has been down this year. So it's quite unlikely Netflix has been growing many subscribers lately. It is even possible that the number of paid subscribers has decreased."
In addition, gross, profit and operating margins have been steadily declining for three quarters with earnings-per-share growth off by 107.44% on a quarterly basis for NetFlix. The profit margin is down to 4.81%. While the current price-to-earnings ratio is 28.49, it is projected to rise to 40.05. Many still believe that the price hike last year still hurts the share price of NetFlix.
For March 2012, there was an operating loss due to the high cost of generating revenue, which looks to endure. As a result, the cash outflow for the last quarter was $112 million. For NetFlix, the cost of content is rising, too. Noted Don Reisinger from Fortune about this: "Netflix‘s content partners know how much power they have over the company. They want a significant slice of revenue. And if they don’t get it, they’re taking their content with them. In the past, record labels tried a similar tactic with Apple. But Steve Jobs had leverage, and knew those labels needed iTunes as much as iTunes needed them. Netflix has no such leverage. With Amazon Prime Instant Video, Wal-Mart’s Vudu, and even HBO Go gaining popularity in the streaming space, Netflix isn’t nearly as important as it once was."
While all that is certainly true, it applies for the competitors of NetFlix, as well. And also rising is subscribers from international markets for NetFlix. Proportionally, there was a huge jump in the first quarter. Subscribers in the United States rose by 1.7 million, much less than 10%. But international subscribers rose by 1.2 million, a significant increase. Of the 29.1 million combined subscribers, 26.1 million are Americans.
The increase in the base of international subscribers for NetFlix in the first quarter was huge, as are the combined implications of this and "Bing Viewing."
There has been a fundamental transformation of the viewing habits of consumers. Many articles have detailed how this is due to the declining attendance at sporting events. Long story short: advanced technology has made it a much more pleasant and cheaper experience to watch the game at home rather than have to drive to the event at $3.50 a gallon, pay $20 to park, sit next to a drunk, freeze in an uncomfortable seat, get puked on, ridiculously overpay for concessions, and then have to fight traffic home. Some of the same applies for having to rent DVDs: that is partly why Blockbuster went bankrupt and NetFlix was at $305 about a year ago.
"Binge Viewing" again alters the equation in the favor of NetFlix, particularly for television shows. It allows for NetFlix subscribers to watch the shows in their desired format, even if that means catching an entire season over one weekend. Television now accounts for 60% of the viewing on NetFlix now that streaming is available. For this, "Content is King" and NetFlix has spent $3.6 billion in licensing rights to establish a content competitive advantage. "Bing Viewing," in particular, places a premium on content as the viewer knows what they want and has no interest in surfing over an index to see if a movie looks interesting. Superior content is a wide economic moat when "Bingg Viewing" is the desired customer. As a result, Citigroup analyst Mark Mahaney projects that the share price for NetFlix could reach $130 over the next year.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, 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.If you have questions about this post or the Fool’s blog network, click here for information.