Netflix (NASDAQ:NFLX) continues to rise after plummeting over 200 points.
Last year Reed Hastings erased a large portion of the Netflix stock valuation by the mismanagement of a simple message. This message was that streaming Netflix and mail Netflix would eventually be separate companies. Some investors believe (as I do) that this split is needed for the company to reach its true potential. The vast and vocal majority of investors believe that the Netflix should never split up the two services and that CEO Reed Hastings is an idiot.
As I stated in my last article I am completely behind the company being split.
Since my December 25, 2011 article the stock is up 43 points to $113 a share. This is despite the general feelings that the stock was headed to zero. Many of the comments on the article were made from people pessimistic about the future of Netflix
"My belief is that Netflix will need to file for Bankruptcy protect long before they release any exclusive content and if the dream is realized it will only happen after they restructure their debt and contracts." - False just look at Arrested Development
"personal feeling is that investing in this company now is like buying pets.com as the .com bust was occurring. It is a trade, not an investment - the investment was in 2005-2009. The moat on this company is eroding quickly, and much of it due to self-infliction." - Really, Pets.com Netflix is a company with 21 million online subscribers not Pets.com.
"Anyone who thinks this company isn't going bankrupt in 2012, knows little to nothing about business. If you look at their entire plan and what it will cost in 2013, you can see they are finished. Netflix will be out of business in 2012-2013" - The business model may adjust to a lower cost model, but it is still viable.
Below are some of the key doubts and risks mentioned about Netflix
- Netflix cannot survive without Starz play. - Risk - Low
The demise of Netflix was also foretold in the expiration of Starz play. This may have been more important when Starz accounted for 8% of the content viewed a year ago but today Starz only accounts for 2%. With all the additions of older TV series I doubt most subscribers would even notice the 2% going away.
- Amazon (AMZN) and Hulu will crush Netflix with Deep Pockets - Risk - Moderate - Does competition from Amazon and Hulu add risk to owning Netflix? Yes! Can Netflix compete with Amazon and Hulu? Also yes. As Michael Olson of Piper Jaffray stated. "Netflix has more of the top 50 TV shows from the last two years, and fewer top 50 movies from the last two years; Hulu Plus has a comparable library of popular TV, but no popular movies, and amazon has very little top-tier content"
- Reed Hastings will cause the company's downfall - Risk - Moderate - Rocco Pendola wrote an entire article about how smart Reed Hastings is. Then he refutes his argument by saying he is not competent to run a business the size or complexity of Netflix. Rocco's quote was "that's exactly what Reed Hastings needs. He needs a Sheryl Sandberg to save him from his unbelievably brilliant self," referring to the COO of Facebook. I have listened to Zuckerberg and Hastings speak. Zuckerberg is no Reed Hastings. Zuckerberg is a college kid who had a great idea and got lucky. Reed Hastings has started multiple companies and has been very successful. He does not need a COO to "save him."
Unlike Rocco and those who share his anti-Netflix beliefs I would like to point out exactly why I think the stock will continue its upward trend.
Netflix will move big into international markets when the time is right. Internationally DVD sales are a non-factor due to rampant piracy. The infrastructure in most of the world will limit the effectiveness of the DVD rental model. These two failings of the DVD service are not present in the streaming service. The Netflix streaming model allows users to gain access to a decent library of material for a reasonable price. As broadband becomes more affordable and accessible the field will be ripe for Netflix.
Does Netflix have the muscle to make the leap to global market leader? Not right now. Netflix needs to shore up the domestic market so when the time is right it can conquer the international market. How will Netflix gain the strength to make large moves internationally? Spanish content.
Fifty million. That is the number of potential Spanish subscribers who could be served in a new deal between Netflix and Univision. Univision already provides content for Latin American Netflix subscribers. With its low price Netflix could even become a viable alternative to cable TV for the millions of Spanish-speaking consumers in the existing U.S. market. Getting these users will provide revenue to shore up the domestic business. As the domestic business gets stronger Netflix will be able to make a big move onto the international stage.
Netflix will not go bankrupt.
The stock is up 61% since my Christmas Day recommendation and the stock will continue to rise. Eventually, Netflix will be split into the two companies as it should be. I believe subscribers will join or rejoin and investors will pile on and the stock will be back above $300 again.
Disclaimer: This article is not to be considered accounting or legal advice.