Netflix is Undervalued and Ready to Climb

By Maxwell Fisher - August 8, 2012 | Tickers: AMZN, AAPL, T, NFLX, TWC | 0 Comments

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In July 2012, Netflix (NASDAQ: NFLX) stock was almost even with its 52 week low, while its 52 week high was around $270. Its all-time high was around $300. This isn't necessarily obtainable within the next few years, but Netflix may easily double or triple its current stock price by 2014 or 2015. Netflix has a fundamentally sound model to improve its leadership position as the top video-subscription network by increasing its revenues and market share from continually expanding its global portfolio. Netflix is focused on the long-term agenda; current shareholders should hold this asset for the long-term to benefit from significant capital appreciation. The market is fickle and Netflix's price fluctuates often with the latest newsbreaks, quarterly releases or shortcomings on previous guidance projections. Bearish investors and pundits overreact as Netflix will most likely fall short of its 7 million projected subscribers by years, while it projects a loss on net income in 4Q12 from investments. There are plenty of opportune entry points for interested investors in the remainder of 2012.

The media, analysts and short-term investors are mostly bearish on Netflix. Factors contributing to Netflix's low price are short-term and superficial at best. Time Warner Cable's (NYSE: TWC) HBO refuting Netflix's suggestion that there may be a partnership in the future is a contributing factor. HBO is one of few cable networks that is a viable competition for Netflix. Lowering its projection of 7 million new subscribers in 2012 due to the underperformance anticipated from the London Olympics is another factor lowering Netflix's stock price. The shrinking margins and subscriber numbers from the DVD division is also a concern hampering Netflix's stock. Netflix is focused on long-term global dominance; short-term traders and pundits see the expenses incurred in the UK, Ireland and Latin America as a loss rather than an investment for future growth. These are the same parties that react to Facebook postings and bottom-line financials.

The whales, hedge funds and inside investors know Netflix is a promising buy based on its solid fundamentals. Using its growing capital and revenues from the U.S market to expand internationally is the current modus operandi. Reinvesting in emerging markets from established markets will enable Netflix to grow substantially worldwide. Whales and hedge funds know this; it's the average investor and reporters that are primarily the naysayers on Netflix. Institutional ownership of Netflix is currently around 88%. Prominent trader, Julian Robertson of Tiger Management purchased over 80,000 shares for around $9 million at the end of 1Q12. Netflix's insiders and hedge funds are currently increasing their positions in Netflix via shares and call options. Even bearish investor John Burbank of Passport Capital initiated a large put option in Netflix recently. No insiders have sold Netflix stock in two years when under $100 per share. Prominent analysts have Netflix set to outperform at around $120 or $130 per share. Netflix margins are intact and it's showing promising growth across key financials. Netflix is looking towards the future; it's investing in the global streaming division opposed to competing with Coinstar's (CSTR) Redbox in the waning DVD industry of the past.

Netflix is in a unique position. It's competing with the MVPDs like AT&T's (NYSE: T) U-verse and cable networks like Time Warner Cable, not Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL) or Coinstar's Redbox. Bearish investors are down on Netflix because of the increasing competition in this industry. Bullish investors counter with the fact that no competitor has the same level of content, subscriber-base, technology or global portfolio as Netflix's current operations and trajectory. Amazon is targeting Netflix's market share specifically by undercutting the price. However, Amazon's 5-year earnings growth is under 5% compared to Netflix's 65%, Netflix's profit margin doubles Amazon's, Netflix's stock price is a fourth of Amazon's and it has exclusive and nonexclusive partnerships that create a catalog of content that easily trumps Amazon's service.

Netflix offers a product that will grow alongside technology from the boom in mobile applications like Apple's iPad and iTunes. This is just the initial phase of Netflix's global expansion from a primarily domestic service. The increasing growth of global telecoms like AT&T and developments of 4G networks in places like the UK bode well for Netflix duplicating the same success it's had in the U.S overseas. Investing to grow in these emerging markets now will fund further growth and yield expertise and dwindling expenses for the future. For example, the current focus and investment towards building content in Latin America may compel and support Netflix's decision to make its expansion into a new European country easier by selecting Spain or Portugal in 4Q12. Established platforms in the U.S and UK may eventually bode well for Netflix in a new market like Australia in the near future.

Netflix's letter to shareholders and quarterly report outlined its fundamentally sound agenda looking forward. It also showed financials that were reasonably in line with the most important aspects of Netflix's model and show promising potential. In 2Q12, Netflix's revenue increased to $889.2 million, a 12.8% increases YOY. At the end of 2Q12, Netflix recorded a total of 30.1 million subscribers; this was an increase of 17.8% YOY. Revenue from domestic streaming and the DVD division totaled around $824 million; this was an increase of around seven percent YOY. International streaming revenue increased to $64.9 million from $18.9 YOY. This was due to an additional .56 million subscribers, increasing the total to 3.62 million by the end of 2Q12. In 1Q12, Netflix generated $43 million from 3.07 million subscribers. The contribution loss from international streaming was $103 million in 1Q12 but only $89 million in 2Q12. In contrast, the contribution profit from domestic streaming was $83 million on revenue of $533 million in 2Q12 and $67 million on revenue of $507 million in 1Q12. During 2Q12, Netflix had a net addition of .53 million domestic subscribers to total 23.94 million, opposed to losing .85 million to total 9.24 million in the DVD division.

I believe Netflix will prosper in the future through building its subscriber base and maintaining consistent growth in revenues from promising investments for operations in emerging markets worldwide. Currently, it's successfully expanding its top tier defensible platform to Latin America and Europe in order to allow growth in other regions. More people are watching Netflix for longer periods of time, and people are telling more of their friends about Netflix in every market. Aside from international growth, Netflix is projected to have 40 million US subscribers by 2015. This asset has the potential to be the number one media subscription service in the near future. This is a defensive asset capable of significant capital appreciation for the long-term.

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