If I were one of those traders who spent hours on the screen looking for action, I'd love NetFlix (NFLX). It is a trader's delight, with plenty of traders on both sides, high volume, and big price swings.
Whatever you think of the company (and CEO Reed Hastings, who is also on Facebook's board, may be the most controversial figure in tech right now), it gives traders action.
One day recently, for instance, it plunged $4 on the open, as Verizon (VZ) and Coinstar (CSTR) rolled out a new competitor, then shot up $6 around noon on rumors it may be part of the coming Apple TV.
Just in the last year it's been as high as $304/share and as low as $63. Did the Super Bowl offer that kind of action?
Opinion is just as divided here at Seeking Alpha.
Rocco Pendola thinks the company's management is on a suicide mission. Robert Weinstein has moved away from the bearish bias.
Here are my two cents.
- Netflix is a store, a sales channel. Folks with stuff to sell need stores. Rocco doesn't think Netflix can get enough good merchandise on the shelves to stay in business, at anything near current pricing. But there's a ton of good stuff out there, and a lot of bad stuff some folks think is good. And given Netflix' business model, it doesn't have to have a lot of good stuff - just enough to keep you in the store. Net-net, Netflix hasn't seen much bleed in its total subscriber count, and if they're not leaving on things like the Qwikster fiasco chances are the $8/month price point isn't very painful. (It took me three months of watching nothing on Netflix to cancel my account.)
- The key to Netflix' function as a store is a continuing, simple relationship with the customer. Having your software in new TVs is just such a relationship, and Netflix has been good about building those relationships. But a more bearish case can be seen in its latest earnings report, covered here by Erick Schonfeld. He notes that Netflix' margins on its falling DVD business are much better than those on its growing streaming business. That spells earnings compression, even at current prices.
Now it's true that TV and movie companies have always sought control of their distribution. It's this control that makes News Corp. (NWS) profitable - the TV stations "buy" the content but the money never leaves the company's hands. But the winds in Washington are blowing against Hollywood, on both the right and the left. (The right hates the product, the left hates the monopoly.) Gaining control of streaming will be difficult, and maintaining control through cable is increasingly difficult.
Fact is there is more content than there is time to watch it. Hollywood needs outlets more than outlets need Hollywood. Netflix is not going to be frozen out, and as potential competitors see that this is a low-margin business, the growth in competition may lessen.
Rocco thinks studios will be able to play off streaming companies against one another, squeezing out their profits and eventually gaining absolute control. But the trends are going in the other direction. Netflix will survive. And there are opportunities for it to try different models, like pay per view or "channels" consisting of a specific type of product, like horror or true crime or romantic comedies.
This still leaves us with the question of price.
How much is NFLX really worth? My own guess is closer to $100/share than the current level. But many new entrants to the space - like Google (GOOG) and Apple (AAPL) - may find even its current price a bargain, compared with the cost of building that channel into other companies' hardware. (And did I mention that CEO Hastings is on Facebook's board?)
What I'm left with is Paul Volcker's advice to the lady who asked what the stock market was going to do. "Madam, prices will fluctuate," he said. Netflix is still going to be whipsawed. If you're an active trader, you can play either side at any time, buy-and-sell it all year, and probably make money on net. You can also make a living playing online poker from a Cozumel vacation resort.
Plunge if you like. Investors, stay away until things settle down. By this time next year we should have a much better handle on Netflix' relations with Hollywood, the stability of the business model, the type of competition it faces, and (most important) whether its management has the imagination needed to keep the customers satisfied.
Disclosure: I am long GOOG.
