Hands down, Netflix (NFLX) had its worst year ever in 2011, fueled by the public relations gaffe of CEO Reed Hastings. The announcement that Netflix would raise subscription rates by as much as 60% and separate the mail order business from the online streaming business sent the stock into a nosedive during the summer of 2011. When the dust settled, the stock shed over 70% of its value to reach a 52-week low of $72.
It is easy to see why investors were getting off the Netflix bandwagon in droves during the fall of 2011. During that time period, Netflix reportedly lost 800,000 subscribers in the third quarter of 2011 alone. However, as an indication of its stability through the financial turmoil, Netflix was still able to report a customer base of 23.8 million and revenue production of $3.2 billion for the year, an increase of $1 billion from 2010 totals.
These numbers indicate is that, despite the epic collapse that Netflix endured with its limited competition and overall domination of the mail order and streaming DVD market, Netflix's share price has bottomed out. With the positive consumer numbers for the start of 2012, along with recent deals Netflix has made with major media corporations, the company is well-positioned to endure the rocky months ahead to emerge as a highly profitable company by the end of 2012.
20th Century Deal Gives Netflix a Strong Foothold in Latin America
In an effort to broaden its global appeal, Netflix recently announced its deal with 20th Century Fox (FOX). This deal allows Netflix to offer online streaming content to 43 Latin countries and territories. This deal includes extensive coverage in Brazil, a country that has experienced the highest growth of all South American countries in its access to Pay TV, with a reported 118% increase since 2008.
As an indication of the market's approval of this deal, the stock rose 2% on the day the news was released. This sudden shift in consumer opinion provides investors with an indication of the continued profit potential of Netflix if it is able to release further positive news in the near future.
Online Streaming to Eliminate DVD By Mail
It is clear that consumers are not spending money when it comes to video rentals. Just look at Blockbuster's (BLOAQ.PK) epic collapse when it reportedly sold to a group of creditors for $290 million just 14 years after Netflix was founded.
In today's busy world, consumers are always looking for ways to cut corners, especially when it comes to aspects of life such as entertainment. Just as the market shifted from store rentals to DVD by mail in the early 2000s, the market will continue to shift as online video streaming continues to increase its appeal to consumers.
This shift is already apparent in the U.S. market. It has been reported that in the last year, video streaming revenue has increased 545%. It has also been reported that the overall digital media market has seen a 74% rise in revenue for the same time period. Despite its recent struggles, Netflix has benefited significantly from the increase in digital media revenue as it reported that it generated $507 million from domestic paid streaming subscriptions for the first quarter of 2012. This figure is an increase of over $30 million from the 4th quarter of 2011.
Foreign revenue from paid subscriptions for online streaming also experienced significant gains, as it saw an increase of nearly $15 million in revenue in the first quarter of 2012.
Netflix Competition Has Yet to Catch Up and Probably Never Will
Netflix still remains relatively unchallenged for the top spot in online video rentals. Wal-Mart (WMT), which completed its integration of VUDU, a streaming company that Wal-Mart reportedly acquired in 2010, currently offers an online movie service that rents video's for $3.99 each. This offering is meant to appeal to casual movie watchers. However, even for those individuals who watch only a few movies a month, paying for a mere two rentals with Wal-Mart will cost the same amount as a $7.99 unlimited streaming subscription with Netflix.
Meanwhile, Amazon (AMZN) has taken the biggest steps in challenging Netflix, as it recently announced its partnership with Sony (SNE) to release an instant video app for all Playstation 3 systems. This move is an effort by Amazon to compete with Netflix's partnership with Microsoft (MSFT), where it offers the Netflix app on Xbox 360 systems. However, despite the entry of two large scale competitors, Netflix, which holds a reported 61% market share of the U.S. online streaming market, remains solidly in front of all its competitors.
Netflix, which reported its first loss in 7 years when it released its 2012 first quarter results, has reached a value not seen since it made its initial climb in 2008. As a result of its current share price, investors should not delay in capitalizing the discount being currently offered, as a large amount of evidence is starting to accumulate in support of Netflix's rapid recovery for the remainder of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.