An Amazing Comeback!

Terry 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)  has been surging lately and the company seems it will go higher in the coming months. I say this because Netflix has turned itself around since the rock bottom point of $55 a share. I think management has realized their mistakes and are ready to take the company to the next level in streaming service and reward shareholders with more value. 

Turnaround story of 2013 

Netflix, over the last few years, has gotten itself back together by keeping the same name before the Qwikster fiasco with management taking charge and providing fans with content they so desired. That's what I will credit management for, is that they decided to get back into the game by creating their own content. Before creating original content Netflix had to dish out millions of dollars to buy other content. Netflix decided it needed to produce its own content to stay competitive. Thus it did create original content with new shows like "Lilyhammer" and "House of Cards," which are good content shows you can't get anywhere else. So what investors here can notice is that Netflix now has a distinct advantage to gain more market share against competitors and turn viewers away from other cable and streaming companies. 

Can Netflix’s price be justified?

Netflix after obtaining a low of $52 a share in 2011, has now since recovered slightly. Although currently it's not at the highs of summer 2011, it's trading at around $200 a share. That puts the stock price valuation with a forward P/E of 81, which is a bit high, but with international expansion and growth of subscribers it seems investors are still buying up the company. I think that the current valuation is high, but with the company announcing higher growth in 2013, it seems that the price is justified and thus I think it is a strong buy for current investors. 

Investors gone wild

Carl Icahn thinks that the growth is there as the Billionaire investor is currently a 10% investor of Netflix. Considering he bought his position back when Netflix traded at $58 a share he is doing very good. The current price is at $200 a share and holding strong, so my bet is that Icahn must be very happy. I think long term investors that have been in Netflix for a long time should continue to hold as growth for the company is improving and the story of adding more content like Disney and Warner brothers makes for a great success!

Momentum stocks: can they last?

As we saw back in September of 2012, Apple (NASDAQ: AAPL)  had topped at $700 a share and had hit a new record high. Many investors were happy and thought that the momentum of the company would continue. Alas, things didn't work out well as Apple started having problems with the supply chain and investors started to get jittery almost immediately selling off some of their Apple shares. Another hurdle for Apple was when it reported earnings in Q1 of 2013! Apple reported earnings of 54.5 billion in revenue, 13.1 billion in profit, and earnings per share of $13.81! Wall Street was looking for $13.55 EPS and revenue of 54.9 billion. So therefore Apple had missed the estimate in revenue thus causing a huge sell off the very next day. Netflix has room to run, but may suffer the same fate as Apple if its momentum gets turned to the downside. Netflix can sustain itself, but has to make sure that it beats the next few quarters estimates and it doesn't lose any content to competitors. We saw how quickly Apple turned down when its investing story collapsed. 

Conclusion thesis

Netflix is a good long term company to own as revenue growth is there and investor sentiment is high. There are risks that I have laid out like other companies in the streaming space, like investor sentiment turning negative, but the story is intact. I would keep an eye on Netflix over the coming months and take a good look at subscriber growth to know whether or not it will continue its momentum upward. As long as Netflix continues its plan of adding original and new content then the company will continue to fly upwards. 


Rennrunn has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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