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I’ve been watching Netflix (NASDAQ:NFLX) since 2003 or so when I first became a customer. Sometimes I debated going long, sometimes going short, but never pulling the trigger. For everything I found I loved about the company, something else scared me just as much. Here is a look at how the company stands today, and everything I love and hate about it.

At first glance, its P/E puts me off. It’s up near 60 in a time when we are heading into a time of slower growth, or possibly recession. Most high P/E stocks don’t look attractive to me for that reason alone. When I look at NFLX's past, it performed spectacularly through the recession. It’s revenue growth was flat for only about 6 months in 2007, then resumed its upwards march. If NFLX was able to shrug that off, it can probably shrug off what’s coming over the next few years.

click to enlarge
NFLX Revenue Growth
Netflix revenue growth compared to 9.86% growth rate per quarter (in thousands)

NFLX revenue growth has been, on average, just under 10% growth every quarter. It will eventually slow down, but for now it appears strong.
Domestic Subscriber Growth
Domestic Netflix subscriber growth compared to 10.52% growth rate per quarter

NFLX domestic subscriber base has averaged 10.52% growth per quarter. International growth is still in its infancy, and isn't worth comparing at this time. After another quarter or two we should have a much better idea of that potential.

Since NFLX can probably shrug off whatever is coming over the next couple years, I then wondered how long will NFLX take to earn its P/E. I found with continued revenue and subscriber growth rates, it
could reach that point by 4Q 2014. Certainly difficult, but possible.

Revenue Growth Hypothetical
Netflix Revenue Growth compared to 9.86% Growth Rate per Quarter (In Thousands)

I also dug into their subscriber churn and found that it has stabilized around 4%, which is pretty good. If NFLX posts churn under 5% in the next two quarterly reports, it likely means that while people were vocally upset about the price increases, their wallets spoke otherwise.
Subscriber Churn
Netflix subscriber churn

Finally I looked at the net margin, which is steadily increasing. The recent change to subscription pricing should also help improve margins.
Net Margin
Netflix Net Margin

From a fundamental standpoint my question needs to be how long I plan on being a shareholder for. If my plan is 5 or more years, then NFLX is a strong buy. On the other hand if I’m planning on less than a year then NFLX could be a decent short play. Just watch out for the quarterly reports.

Bigger Picture

Once I step back from the stock, a lot more surrounding the company comes to light.

  • Competitors: Hulu, Redbox [owned by Coinstar (CSTR)], Blockbuster (OTC:BLOAQ), and Amazon (NASDAQ:AMZN) all compete on some level. Customers still like NFLX, but NFLX isn’t large enough to push everyone around.
  • Content: Starz [owned by Liberty Me (LSTZA) is leaving, which isn’t good, but the money it saves could potentially be put to other quality content. I consider this a wash.
  • International Growth: The first few quarters looked promising; it’s certainly growing faster internationally than it did domestically. However the last quarter left a lot to be desired in terms of growth. If that trend doesn’t immediately revert, NFLX’s growth prospects will be bleak as domestic growth can’t possibly keep up the pace it’s on.
  • Cord Cutting: It’s happening. You might say this is great for NFLX, and for a short while it will be. The moment the big cable providers feel threatened by the amount of people doing that, NFLX will come under fire. Wireless carriers are already putting bandwidth caps on data, AT&T (NYSE:T) is even putting a cap on its cable internet. How long before others follow suit? NFLX may still be a bargain, but once you factor in additional internet fees it might not be so great anymore.

Unfortunately, I’m still in the same position I’ve always been in with NFLX. It has some amazing growth prospects, it’s healthy financially, and not only survived but grew during a recession. But then, there are the huge competitors that will try harder and harder to knock NFLX down as it threatens their bottom line.

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