Netflix the Next Groupon? Not So Fast
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone has dismissed Netflix (NASDAQ: NFLX) as becoming the next Groupon (NASDAQ: GRPN). I can’t blame them – it’s easy to fall victim to that belief. There is nothing protecting that easily repeatable business model. Add in a few more well capitalized competitors and you get the end of days priced into Netflix. Both companies hit 52-week lows this week. Investors are convinced they share the same fate. I think they are wrong about Netflix and I’m here to explain why.
Investors were super amped about second quarter results – for good reason. CEO Reed Hastings decided it would be a great idea to brag about Netflix’s streaming numbers with an impromptu Facebook post. When the majority of investors learned that one billion hours were streamed in one month, they thought it meant subscriber growth was much stronger than expected. Who wouldn’t believe that? In reality, come the quarter results, it meant existing subscribers were simply streaming more – a whole lot more. Shares plunged 25% when subscriber growth was more or less in line with pre-Facebook expectations. Talk about raising your own bar. Nice work, Mr. Hastings.
Prosper and Funnel
Netflix is very good at predicting the future. That’s because they can perform an overly complicated formula involving subtraction between revenues and fixed costs. The difference is operating margins, which is how they fund new growth. The goal here is not to hit home runs in new markets right away – it’s to make enough profit to fund the next market. Over time, if executed properly, earnings will begin to compound exponentially. Before then, I wouldn’t be surprised if Netflix wasn’t all the profitable for the years to come. I think the payoff is coming much further down the road.
Competitor Pipe Dreams
Internet media streaming services are becoming a dime a dozen. For Netflix, this is not a desirable position. Netflix finds comfort within their timing, large subscriber base, and brand recognition. Woody Allen once said, “80 percent of success is showing up,” which is exactly what Netflix has done. And they did it first. This has allowed them to capitalize on creating much stronger brand recognition over competitors. Yes, even over Amazon (NASDAQ: AMZN). Not everyone who is familiar with Amazon associates them as being a video streaming service – let alone a good one.
Coinstar (NASDAQ: CSTR), parent of Redbox, has yet to leave the gate with their Verizon-backed service. They have a tremendous amount of ground to cover before they can become a serious player in the streaming world. And this isn’t going to happen overnight.
How could I forget about Hulu because it’s backed by Disney (NYSE: DIS) and other big media outlets?! While true it has more current TV releases, what it gains in timeliness it lacks in volume. They don’t even come close to having the same sized library as Netflix. It’s become more of a service for serious TV buffs than one for the masses. In other words, it competes for a much smaller percentage of the market.
Take it or Leave it
Netflix owns the collective mindshare of internet video streaming, which is a huge advantage over competitors. In terms of sheer numbers, Netflix has the most streaming subscribers, with 24 million domestic, and 3.6 million international. International is the growth story for Netflix, having grown 373% in the last year. And that’s where they have the biggest lead. Most importantly, they have their plan in place and seem to be operating it in the way they expected. If all goes to plan, international subscribers will surpass domestic in time. In the end, I anticipate the journey to be a bit bumpy for Netflix shares, but they have the elements for a huge growth story in the making.
TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Walt Disney, and Netflix. Motley Fool newsletter services recommend Amazon.com, Netflix, and Walt Disney. 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.