NetFlix (NASDAQ:NFLX) gave everyone quite a surprise Monday as Apple (NASDAQ:AAPL) gave the company approval to have its NetFlix App available on the Apple iPad Apps Store. This news creates a whole new chapter for Netflix, as it opens many new markets to them just from the iPad alone. Before I get into the analysis, I invite everyone to view this YouTube video demonstration of just how well NetFlix plays on the iPad.
I, for one, am very impressed by the demonstration and though I follow both Apple and NetFlix closely for my clients, I never expected this killer app to come out so quickly. This analysis today is going to be a Qualitative Analysis and not a Quantitative one. If anyone wants to read my quantitative analysis of NetFlix, you can do so by clicking here.
The article also contains a link to my instablog free cash flow analysis of the company as well.
Qualitative Analysis is the analysis of a company’s business strategy. It is an analytical method developed by Philip A. Fisher.
The ideal company that a Qualitative Analyst looks for is one that does something totally different from its competition and has an extremely unique business model. NetFlix is such a company and has basically brought its competition Blockbuster (BBI) and Movie Gallery (MVGR.PK) to the point of extinction. Everyone already has some idea of how unique this company is and if they don’t, they can read my article that I have linked to above.
What I want to discuss here is how the iPad can have NetFlix go from a high growth company to a hyper high growth company: By allowing it to expand globally at light speed and piggyback off of the future success of Apple. What NetFlix will do, by being on the iPad, is expand its digital delivery format to whatever countries Apple sells it in. This is not a 2-3 year strategy. Rather it is a global decade-long strategy that is unfolding.
When the iPad hits England, Greece, Japan, Australia etc…NetFlix can offer its own service by giving away the free App and then allow the user to sign up for an $8.99 a month digital only service. So a college student in Germany or Mexico can download the 13 episodes of Spartacus: Blood and Sand or a Japanese child can download the Marx Brothers Duck Soup. Since NetFlix is basically a USA-domiciled company, its international expansion could be something amazing. Though its digital service is limited to 12,000 movies right now, the company could easily grow it to house multiple tens of thousands of movies if it had the marketplace for it.
I am sure people throughout the world would love to pay $8.99 a month and get Star Trek episodes or Woody Allen movies on demand no matter where they are, once 3G becomes available. As for myself, when I travel I will have my ebooks and magazines downloaded and ready to go. When I'm stranded at the airport I can watch a movie to pass the time.
Sure NetFlix will have a ton of competitors beating down the door trying to duplicate its system, but no one has the economy of scale that NetFlix has. I, for one, am amazed that Steve Jobs has not written a check for $5 billion and bought out the company. But you never know. NetFlix is also preparing to release an App for the iPhone as well as the iPod and is getting permission quite easily from Apple to do so.
I have no knowledge of anything like this happening. But you have to wonder: With Apple having $25 billion in cash and Netflix being a perfect complement to its products, it would, in my opinion, be a perfect fit.
I hope such a deal never goes through though, as NetFlix still only has a $4.5 billion market cap and has a tremendous future ahead of it. Sure there will be attacks by those trying to gain market share on the streaming end, but no one has the movie studio connections that NetFlix has. Also, with Blockbuster and Movie Gallery going bankrupt, NetFlix is currently the only game in town. From the reaction in the stock market Monday it seems that people are waking up to the power of NetFlix on the iPad, IiPhone and iPod. Giving the App away for free is just pure brilliance in my opinion.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. Please note investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Disclosure: Long AAPL, NFLX with no positions in the others