It was about a year ago that my wife finally convinced me to sign up for the Netflix (NFLX) mail-order-DVD-rental service. After some careful thought, I decided to choose a slightly more expensive membership that included access to its streaming media content. Two days later I found myself researching the company's fundamentals and growth strategies. That same day I opened my initial Netflix position, as a long.
I believed that Netflix would revolutionize the industry with its streaming media platforms, which seemed to be coming pre installed on every electronic device imaginable. I told anyone that would listen to try the service and have a look at the NFLX ticker. I suspect those that bought the stock back then are very satisfied with their gains, realized or on paper. Even more satisfied, should be the investors that had enough conviction to add to their positions on substantial pullbacks throughout CY 2010.
So, is it possible that the current undisputed champion of the video rental industry is getting a bit long in the tooth?
It seems like analysts are asking that question every other day now, which is what may have spurred a recent and sudden realization of mine: It has been nearly a month since my household last used the Netflix DVD rental service.
The mail-order-DVD-rental service is what initially attracted many of the company's current customers and investors. The good news: To this day, Netflix continues to have that portion of the market virtually cornered. The bad news: The industry, as a whole, is trending away from DVD rentals ...
Two unfortunate realities for Netflix:
1. The future of the rental industry is streaming media.
2. Many well established companies with strong existing customer bases such as Apple (AAPL), Amazon (AMZN), Time Warner (TWC), and Google (GOOG) continue to invest heavily in the development of their streaming media arms, increasing both the quality and quantity of their movie and television content.
Some of the above listed companies and many upstarts just entering the crowded digital media market would like nothing more than to upend Netflix as the current industry champ. If nothing else, they will continue to collectively cut into Netflix's very large share of the pie.
To add to my short list of concerns, Netflix has recently stated they do not intend to provide full-year revenue or subscriber growth guidance for 2011. This leads me to wonder if the stellar year over year growth percentage increases many have grown accustomed to will soon become a thing of the past.
Will Netflix continue to be a strong performer in your portfolio for 2011?
For now, I'd say it is more likely than not.
Rising content and digital streaming costs along with price wars will inevitably lead to shrinking margins and the stock's share price will eventually reflect it, just not anytime soon. The company's positive Q4 2010 results seems to have silenced many of its critics while propelling the stock to new 52 week highs. With its current subscriber base of over 20 million and plans to further expand its international presence, Netflix appears well positioned to hold off the competition and continue to grow while increasing shareholder value for many quarters, if not years, to come.
As such, I plan to take any serious market corrections over the next two quarters as opportunities to add to my current position and will possibly be looking to reduce my NFLX exposure and take some profit ahead of any hard ceiling the stock may find in the second half of the year.
Disclosure: I am long NFLX, AAPL.