Netflix Will Recover

By Scott Huber - August 1, 2012 | Tickers: AAPL, NFLX | 0 Comments

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Netflix (NASDAQ: NFLX) has endured a week to forget. Scratch that, Netflix has endured a year to forget. As we all know, the slide started in mid- 2011 when CEO Reed Hastings made the ill-fated decision to announce that Netflix would split in two: a stream only service (Netflix) and (Qwikster) the DVD-only service. Hasting also announced that DVD subscribers would be hit with a rate increase, putting an end to the milk and honey days of $7.00/month unlimited DVD rentals. Overwhelming consumer and Wall Street backlash eventually led to Qwiksters’ demise before it was born. Hastings retreated on Qwikster, but held fast to the new DVD pricing model. By this point the damage had been done and Netflix was no longer the Wall Street darling. The prediction of mass consumer exodus from Netflix never materialized, but the trend was set. But, I'm not here to bury Netflix, actually my feeling is quite the opposite. Ever since I first became aware of Netflix around 2007-2008, I was going to buy some stock. But like so many other great missed opportunities, I never did. In 2011, I was kicking myself as Netflix soared to $300 a share. I vowed then that if I ever get another shot like that I'm going to take it. I think that opportunity is here and I'm laying out six reason why:

1. Netflix offers an unparalleled level of content and reliable service.
2. Netflix has a 44% share of domestic online movie viewing, in America. Eventually I believe they will match this percentage in South America and the United Kingdom, and Canada, where they are just taking off.
3. Netflix will figure out how to make large studio pictures available again through a pay per play feature and increase revenue without increasing subscribers.
4. Netflix is now producing terrific original content such as Lillyhammer, a re-introduction of Arrested Development, and House of Cards, all of which will draw in new viewers.
5. 27,000,000 mostly satisfied subscribers (including myself) paying at least $7.99 a month for the streaming service/DVD service. This number didn't grow a whole lot in the 2Q, but with how slow the economy has been any growth is good. I think new subscriptions will increase when the economy improves.
6. Finally, I am high school teacher and some of my most successful stock picks have come directly from my students or from observing their consumer habits, like Apple (NASDAQ: AAPL). Approximately 80% of my students have Netflix accounts that are paid for by and shared with their parents. Netflix is as entrenched with that generation as Apple. The bottom line is Netflix is not going away.

Netflix took a big hit after their earnings report, and its stock subsequently dropped around 30%, hitting a low of $56.01 on July 26. The bleeding finally stopped on July 27, with a little rebound of 3.35%. The market overreacted and although growth will slow as Netflix's business matures, the numbers of new subscribers in the younger demographic and emerging markets will ensure steady growth into the future. The stock should rebound to the $80-$90 dollar range in the next few weeks. I would be a buyer under $65.

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