Don't Count Netflix Out Yet

| About: Netflix, Inc. (NFLX)

by James Brooks

It appears as though Netflix (NASDAQ:NFLX) may continue to struggle with rising content acquisition costs. However, as long as the company continues to improve its service, and continues to make big content acquisitions in the face of rising costs, there may be a chance for the company to grow and increase its stock price. Currently sitting at $67 per share, Netflix's stock is only $7 above its 52-week low. While I believe Netflix can position itself for stable growth and continued success, I do not believe it will ever reach the $300 range it achieved in the summer of 2011.

Even though Neflix brings in huge amounts of revenue, investment research firm Valuentum Securities believes the company is struggling to stay profitable; most notably due to rising costs of acquiring content. The rising cost of content is coming from the high demand and popularity of instant streaming, and the stiff competition that Netflix faces. Other services like Hulu,'s (NASDAQ:AMZN) Prime instant streaming service, and even Comcast (NASDAQ:CMCSA) are competing with Netflix to acquire the best online streaming offerings, which allow the content owners to increase their prices. Netflix may be unable to compete with competitors that have larger cash reserves.

While rising acquisition costs are certainly troublesome for Netflix and potential investors, this is not the full extent of Netflix's problems. Netflix has also felt the effects of the struggling economy more than other entertainment options have. For example, look at a comparison of the service Netflix provides versus the service provided by Coinstar's (NASDAQ:CSTR) Redbox. While Netflix provides more content to watch, it also does so through a monthly subscription, which may prove to be too expensive for those struggling with the economy. On the other hand, Redbox is a cheaper option for those who watch an occasional movie, and its success has not been negatively affected in this economy. Given that the United States' economy is a mess, and the future is very uncertain, I think Netflix will continue to be a victim of a bad economy.

As long as Netflix can continue to ride out America's slumping economy and improve the service it offers even with rising costs, I believe it will enjoy growth and an increase in its stock price. One place Netflix may receive a competitive boost is from the Justice Department. Justice Department officials are conducting an antitrust investigation within cable companies with the belief the companies may have acted to quell online video competition.

Since many cable providers also offer the best internet service in an area, the Department of Justice is focusing its investigation on data caps, which happens when the provider limits how much data can be downloaded each month. For example, it is believed that Comcast may be setting data caps on its users so they cannot stream instant video as easily, making services like Netflix less useful. Netflix will receive a boost in its value and stock price if the Justice Department finds these cable companies guilty of this behavior.

Netflix is once again looking to redesign its service; this time, to put more of a focus on movie versus television show viewers. The new design of the website will include a tab for those searching through the movie titles, and a separate tab used for browsing the television shows. This should make it much more convenient for subscribers to find the title of their choice, which should, in turn, increase the value they receive from Netflix's service. This could lead to an increased number of users, higher revenue, and a rising stock price.

The company is improving the way its service works in a few other ways as well. For one, Netflix will be adding a service so two users under one subscription can watch different titles concurrently. This should also add value to each subscription, hopefully making the company more popular and eventually profitable.

Netflix has also announced the launch of its own content delivery network [CDN]. Open Connect, as it is called, will directly connect Netflix videos to the internet service provider for faster data transfer that should hugely improve customer experience. Netflix currently uses third-party CDN providers like Akamai Technologies (NASDAQ:AKAM) and Limelight Networks (NASDAQ:LLNW). This will prove profitable for Netflix, as providing its own CDN will reduce costs by eliminating the CDN provider profits. Furthermore, its own CDN should improve the reliability of its services, and therefore, make its customers happier. By doing this, Netflix should be able to increase its customer base, eventually increasing sales and profits.

Unfortunately for Netflix, all the improvements in the world won't make a difference if it does not have a decent library of movie titles and television shows. With the increasing cost of acquiring big titles, Netflix will find it challenging to acquire popular titles at an affordable price. Recently, Netflix has shown a hint of success in being able to get the blockbuster films and television shows. The company signed a multiyear deal with Warner Bros. to stream previous seasons of ABC Family's popular shows Pretty Little Liars and The Lying Game. Similarly, Netflix will be adding The Walt Disney Company's (NYSE:DIS) popular group of superhero movies, including Thor, Captain America, and possibly even The Avengers in the near future. Miramax is also allowing part of its large library of film to be streamed via Netflix, including the Oscar winning The Cider House.

While the future of Netflix is uncertain, especially with the rising cost of acquiring content, I do believe there is some promise for Netflix's future. It is still a very popular, easy to use service, with a huge customer base. Furthermore, it is working to improve its convenience and speed of service. Lastly, if Netflix can continue to improve its library of titles, just as it has with its new Warner Bros., Disney, and Miramax offerings, Netflix's volatile stock price could stabilize, and actually enjoy some slow, steady growth. I am not convinced that Netflix will continue to head in the right direction, given its number of follies in the past, but if I were a potential investor, I would keep my eye on Netflix, preparing to invest as its service improves.

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