I want to be bullish on Netflix (NFLX), I really do. With the amount of negativity I am seeing in comments here and elsewhere, I believe that the expectations for NFLX are so low that any surprise will lead to another short covering rally that could close the gap that was formed after the 1Q earnings announcement.
Earnings after earnings the NFLX management team consistently beats on the top and bottom line; even the last quarter saw a double beat but lowered customer guidance dropped the stock back down to new lows.
While, as I have previously written, Netflix does not have much new content on tap for 2012, the recent moves and decisions that have been announced by the company have shown a maturity in the decision making process that has been absent for some time.
Even with all of the recent good news, I can't really put my support behind the current management team due to some simple steps that have as of yet not been taken by the company.
The first of these issues is the refusal to allow rentals and purchases of first run digital content. While the stated reasons for the refusal to do so center mainly around Reed Hasting's vision of what streaming should be, the customers have already spoken and the continued revenue seen by Amazon (AMZN), Apple (AAPL) and Wal-Mart (WMT) show that they want and will use this service.
Will the margins stink? Sure. But margins are already bad at the company, so this is simply an additional revenue stream that they could capture from the currently captive 27 million strong customer base.
Where exactly is the downside in allowing your customers to purchase an item from you instead of your competitor? If they are worried about it showing up their streaming all you can eat buffet option, they need to realize that this is a service that the customer are already using. Even worse they are using it at the companies that are currently gunning for Netflix's customers.
With DVD on the outs, the company is going to need to continue to diversify their revenue streams. They are never going to be able to offer first run content on their all you can eat buffet aisle, so why not offer an ala carte and fresh menu before the customers leave your store due to a lack of offering.
If Netflix is serious about becoming a destination for all things streaming, their current decision to avoid an already successful and in demand market simply smacks of hubris and a lack of understanding by management.
Next on the list of inanities out of the Netflix board comes their decision to release the new and exclusive content like Lilyhammer, House of Cards and Arrested Development all at once.
You invest tens of millions of dollars in a series and even if the series is successful the most you will be able to get out of a customer that joins to watch it is one month's subscription fees if you offer all of the episodes at once. Since you offer a free month of service for anyone with a credit card and an email address, there is a good possibility that you will actually be getting a total of $0 return for your original content investment. Sure, the customer wants everything at once. If I can have something immediately and for free, of course I want it that way. Great for the customer, abysmal for the company.
Even a simple 10 episode season spread out to once a week will get a customer that likes the show locked in for 3 months of the service. Take out the free month and you are still getting $16 from that customer. If the show is good enough to justify spending tens of millions of dollars on, it should be good enough to make the customer willing to wait a week for the next episode.
What if the customer hates the show and cancels right afterwards? How is that any different from a customer that likes the show, watches it in the free month and cancels right afterwards? Netflix would have spent the same amount for the content but been denied their revenue due to this operational snafu.
Serialization has been a standard in the entertainment industry for hundreds of years. Books were sold chapter by chapter because the amount of effort it took to create and publish a successful story was not being properly rewarded without such tactics. Where exactly Hastings and Co. get off on determining that their "vision" is better than a fundamental concept used throughout the industry I simply don't understand. Must be right next to the spot in their "vision" that saw the stock going to $1000.
Netflix and the "Vision"
These two relatively simple decisions would greatly improve Netflix as a business. The first is simply customer positive. The customer doesn't have to use the service, but since they are already using it elsewhere, why shouldn't Netflix be capturing that revenue. The second, while technically customer negative, is basically second nature to the current viewing public. Sure, you can be all innovative and lose money but the management team at Netflix need to understand that their "vision" has serious blind spots.
Trading wise, NFLX is currently in No Man's Land. With RSI and stochastics at equilibrium and no major chart setups in play, the stock could pop or drop into the 2Q earnings. If NFLX does head back to the lows I would suggest starting a position to play the potential for a bounce after 2Q earnings.
The stock has a high short interest right now at 24.4% of the float held short so the potential for a short squeeze on a positive surprise in domestic streaming customers is high enough to warrant a small position ahead of their earnings around July 26th.