Online Streaming: Netflix's 'Magic Pill'?

| About: Netflix, Inc. (NFLX)

With the recent news that Netflix (NFLX) topped 1 billion hours of streaming content for the month of June, traditional cable companies like Comcast (CMCSA) and Time Warner (TWX) ought to be concerned. But if you're an investor of Netflix, the future could be very bright. And once the company rolls out its original programming, traditional bigshots like Viacom (VIA) and Disney (DIS) ought to take notice as well. The internet is changing the way people watch television, and it's good news for Netflix and bad news for those who do not adapt.

Currently trading at about $82, the stock is clearly nowhere near the level it was trading at its peak. Last summer, its stock reached highs above $300, only to fall due to a string of questionable decisions by the company. However, investors have seen a short-term rise in Netflix's stock price thanks to a string of good news about the company. And while the stock still hasn't recovered from its rather precipitous fall, it is currently at its highest point since April, a great indicator that Netflix could be headed up for quite a while. Most recently, shares jumped thanks to a post on the Facebook (FB) page of CEO Reed Hastings announcing the company had passed 1 billion hours of streaming for the month of June, an all-time record. In fact, if accurate, the number would mean more people watched Netflix in June than any cable company in the U.S., no small feat. One analyst, Citi Internet's Mark Mahaney, is confident Netflix is a buy, believing it could reach $130.

"Competition remains a very significant risk, but Netflix's execution track record - even with the second-half 2011 pricing and product mistakes - is relatively strong," Mahaney told the Wall Street Journal. "And the Netflix streaming story is still in its early days."

One reason so many people are using Netflix? Cable TV subscriptions cost 10 times as much. In difficult economic times like these, often luxuries such as cable television are the first to go. At only about $8/month for unlimited streaming (without advertisements, too), Netflix is extremely affordable. Thus, traditional cable giants Comcast and Time Warner are seeing more and more customers cut their service in favor of cheap alternatives like Netflix. While this would certainly seem to suggest tension between Netflix and these traditional companies, CEO Hastings continues to downplay this, arguing Netflix is essentially just a supplement to cable, letting people "catch up" on old seasons of TV shows. Of course, this is just a PR move, as Hastings likely won't shed any tears over people leaving traditional cable companies in favor of Netflix.

As for content providers like Viacom and Disney, perhaps they would be wise to limit the amount of content they actually provide to Netflix. Many are actually turning to Netflix to avoid advertisements, continuing a trend hinting at the distaste many are beginning to have for commercials. Since advertising revenue is a huge part of companies like Viacom and Disney, they would be wise to pay attention to this. People are always going to want to watch the content provided by those companies, but if they choose to do it using a service like Netflix rather than the traditional television route, those advertising revenues are lost. Thus, if I were Disney or Viacom, I would be very weary about licensing my content to Netflix at all.

Cable companies are not taking Netflix lightly, either. Comcast recently got into online streaming content, and Verizon (VZ) will be launching similar services later this year. A more direct competitor, (AMZN) has seen modest success with its online streaming service, though it is still far behind Netflix. All of this suggests Netflix must continue to innovate if it wants to maintain its modest rebound.

But another reason to be optimistic about Netflix's future is that it has yet to roll out its original content, which should drive even more viewers to the company. The big one here is a new season of the critically-acclaimed Arrested Development. Netflix will be the only place to watch the new episodes of the show that has generated quite the cult following since it was cancelled in 2006. This was a huge get for Netflix, and numbers for the episodes should be huge. Most recently, it was announced the episodes would be available in the U.K., which according to Zacks, should expand Netflix's market even further. CEO Hastings is predictably excited about the original content, stating, "When 'House of Cards [another original show] and 'Arrested Development' debut, we'll blow these records away" - referencing the impressive June numbers previously mentioned. One could dismiss this as an obvious thing for a CEO to say, but I think he's right. Arrested Development is an extremely popular show with the 21-35 crowd, exactly the type of people who use Netflix the most.

To be clear, it's far from guaranteed that Netflix will approach the heights it once reached. One would be wise to be cautious about the likelihood of everyone abandoning their previous cable viewing in favor of Netflix, but there should be a slow siphoning of cable viewers nonetheless. Much of the potential success of Netflix is going to depend on the success of its original content, and I'm very optimistic about Arrested Development, especially. Investors are higher on Netflix now than just a few months ago, and with good reason I think. Given that the company just reached a viewership milestone, as well as the fact that it will soon be rolling out its original content, now seems to be a great time to invest in the company. It might not get back to $300, but I would be very surprised if it didn't get above $100 and stay there for the foreseeable future.

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