Investors Should Keep Netflix In Their Portfolios

| About: Netflix, Inc. (NFLX)

Netflix (NASDAQ: NFLX) is clearly on a roll in the wake of its entry into producing original content. The Internet streaming service recently reported its first quarter 2013 results, which showed that it already dominates the industry. For the quarter, Netflix said it added two million new US subscribers to its streaming service, bringing its total US subscribers up to over 29 million. With these figures, Netflix is seen as being a more popular entertainment option than cable networks. Its subscriber base already surpasses that of premium cable network HBO (NYSE: TWX), which has 28.7 million subscribers. However, some analysts are raising questions over the sustainability of its model. Should investors hang on to their Netflix stock or prepare to sell when the bubble bursts?

The growth in Netflix's subscriber base was attributed to its focus on providing exclusive original content, which has helped it to leapfrog over competitors such as Amazon (NASDAQ: AMZN) and the new Redbox Instant service of Verizon (NYSE: VZ). Its original series House of Cards launched to critical acclaim from critics and the close to 900,000 subscribers who have viewed it, giving it an average ranking of 4.5 stars out of five. Netflix recently released another original series, Hemlock Grove, and is preparing to release a new season of the critically acclaimed sitcom Arrested Development in May.

The increase in subscribers has led to substantial growth in Netflix's revenue in the first quarter of 2013. Domestic revenue grew 26% to $639 million from $507 million in the same quarter last year, while global revenue increased to $1.02 billion from $870 million. The company added that the growth in subscribers was not due to an influx of 'free trial' gamers who signed up for the free monthly trial to watch House of Cards and then cancelled their subscription, since only 8,000 people did this. However, it still was not clear what the actual impact of House of Cards on subscriber growth was. Due to its heavy investment in original content, as well as the rising costs of licensing non-original content, Netflix actually reported $42 million in negative free cash flow for the quarter, although this was still an improvement over the $51 million reported in the fourth quarter 2012.

The concern analysts expressed was if Netflix could still continue to enjoy subscriber growth if it was forced to raise its monthly rates from its current $7.99 in order to increase its revenue to cover rising content costs. The tolerance of the company's customer base for higher monthly rates in exchange for increased value will be tested when Netflix launches its new $11.99/month plan that allows a user to simultaneously stream content on four devices.

So, is the Netflix bubble about to burst? Not at any time soon, given its lead over its competitors in producing original content. The company has a full slate of original series in development and on the horizon. Its third original series, Orange is the New Black, is set to be released in July, while the animated series Turbo F.A.S.T. (Fast Action Stunt Team) follows in December. The second season of House of Cards lands in 2014, followed by more original series. Short sellers who made a gamble that Netflix stock would fall when first quarter results were reported lost their investments as prices rose by 24% to $216.62 following the release of first quarter results.

Meanwhile, Netflix's rivals are still struggling to compete. Verizon and Coinstar (NASDAQ: CSTR) recently launched their competing Redbox Instant streaming service after three months of beta testing, but its initial offering of just 4,700 titles trails far behind the streaming library of Netflix, which offers subscribers some 3,000 movies as well as more than 20,000 episodes of TV shows. Amazon, meanwhile, launched its Pilot Season initiative, in which it put 14 pilots online for users to watch and vote on, with the ones getting the strongest audience reaction getting series orders, and is also becoming more aggressive in acquiring non-original content for its streaming library.

However, analysts believe that Netflix is so far ahead of its competition that its rivals will find it hard to compete, and the company can only increase its market share further as it continues to invest in original content. Its dominant market position will also make it more likely that content providers will sign up with Netflix to reach its substantial subscriber base. And as the costs of other entertainment options continue to increase, more users will sign up for a Netflix subscription. International streaming is also a possible source of future growth, as the market remains untapped. For the first quarter, the company added some one million international subscribers, pushing the total to seven million. To sum up, Netflix stock is as safe a bet as investors can make these days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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