Faith in Netflix: Expecting More Dark Days Ahead for Shorts

| About: Netflix, Inc. (NFLX)

Just like a movie, some stocks will make you laugh and some will make you cry. If you bought Netflix (NASDAQ:NFLX) early enough, and had the courage to hold on, then you’re probably laughing all the way to the bank. If you invested in Blockbuster (OTC:BLOAQ), well, to quote Borat, not so much.

It’s hard to believe that there was once a Blockbuster on almost every corner, and that the company had a major market penetration advantage over all of its competitors. For a time the movie rental business was good for Blockbuster, and they padded their earnings with game rentals and point-of-sale junk food and drink concessions. Unfortunately, bad deals, bad decision-making and bad earnings helped bankrupt the company. But the final nail in Blockbuster’s coffin was the advent of Netflix.

Even harder to believe is Netflix's share price, which currently sits at about $244 a share and translates into a market cap of about $13 billion. Had you left the planet for ten years when NFLX shares were around $5, and never read the financial section of a newspaper, you’d probably think that number was a typo. Or perhaps the raw materials used to manufacture DVDs somehow became rare earth substances, more valuable than their weight in discs.

What’s really happened is Netflix has continued to grow profits, quickly adapting to and leveraging the changing nature of content delivery in the digital age. By offering paying customers a streaming movie option, Netflix went from the fastest-growing customer of the U.S. Postal Service to the biggest source of streaming digital content in North America during peak nighttime viewing hours (see here).

And earnings? You want earnings? Well, Netflix will give you stinkin’ earnings—and big ones. Over the past five years Netflix has grown revenue year-over-year, along with EPS and operating income. Between 2006 and 2010, Netflix generated operating income of $65 million, $92 million, $122 million, $192 million and $284 million respectively. As expected, net income grew sequentially as well, with the company posting diluted EPS of .71, .97., $1.32, $1.98,and $2.96 per share, over the same five year period.

Netflix's new subscriber numbers have been equally bullish. In 2010, the company added more than 7.7 million subscribers, bringing the year-end total to 20 million. That is a year-over-year increase of 63%, with the fourth quarter of 2010’s 3 million-plus new subscribers the best of the year (see SEC filings).

Netflix isn’t content to rest on their laurels. Andy Hargreaves, a tech stock analyst with Pacific Crest, reported last month that Netflix is in preliminary talks to cut a deal with Facebook. According to Hargreaves, the two companies are looking for ways to integrate their services, although Facebook recently launched a streaming content service of their own. While the deal might have minimal impact on gaining more domestic subscribers for Netflix, the company sees it as a way to reach Facebook’s international users.

Of course, all of this good news hasn’t stopped professional naysayers from betting against Netflix’ continued success. Although institutions hold approximately 80% of Netflix shares, about 20% of the company’s 50 million share float has been sold short. But looking at the Netflix chart, it’s been a Blockbuster of a bad ride for the shorties, and there may be more dark days ahead for those non-believers if Netflix continues to deliver the goods.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.