Debt Questions Will Not Inhibit Netflix Stock Gains

| About: Netflix, Inc. (NFLX)

Some people may be kicking themselves if they previously considered investing in Netflix (NASDAQ:NFLX), but decided to change their minds. The stock has quickly jumped due to little more than an announcement of increased viewership. After this initial jump, however, some may be wondering if they should still get on board. Despite the rise in price, I would still recommend investing in the stock. I believe the company will continue to show strong numbers in terms of viewership, and even a potential debt "problem" does not appear to be such bad news. Investors should consider Netflix as an investment candidate.

Netflix is currently trading around $82 and it has been increasing greatly since July 2, although this upward trend may stabilize for a little bit now. As many investors are fairly aware, it has a 52-week range of $60.70 to $304.79. After such a massive drop, however, this 52-week high is clearly a poor indicator of what the stock will do in the future. It has a market cap of $4.55 billion, a P/E of 27.72 (NYSE:TTM), and $3.36 billion in revenue .

Netflix CEO Reed Hastings recently announced that subscribers watched over one billion hours of streaming video content in the month of June. This followed a positive review from Citigroup (NYSE:C) analyst Mark Mahaney, released just the day before. He even gave it a target of $130 per share. As a result of these two things, Netflix stock increased dramatically throughout the week, opening at $68.49 on July 2 and then opening at $83.74 on July 6. Things seem to be stabilizing slightly, but I think Netflix still has room to grow, even if it has become a little bit of a risky stock.

Netflix's streaming service has been growing in popularity as it is the largest part of Netflix's business, bringing in 19.1 million customers. In addition to these streaming-only customers, there are an additional 7.4 million DVD-and-streaming customers. There are only 2.7 million DVD-only customers, showing that this service is becoming less desirable. Its streaming-only and streaming-and-DVD services have more customers than leading cable provider Comcast (NASDAQ:CMCSA), which only has 22.3 million TV subscribers. Netflix has been spending a lot of money to improve its streaming service in anticipation of lower DVD sales, and it appears that the company has done everything right.

Netflix streaming and other online services may continue to overtake television. Of the customers that have gotten rid of cable services, 33% claimed that they would not go back to cable, even with a drastic reduction in price. This spells trouble for other companies like Dish Network (NASDAQ:DISH) and DirecTV (DTV), as Netflix should hold on to the customers it has taken from them, regardless of the actions from cable companies. Streaming has continued to gain popularity, so those who criticized Netflix's actions to focus on streaming may feel a little foolish at the moment.

Some have also been pointing to the company's upcoming original content as another factor for its improved business. I do not think this will bring in additional viewers until the premiers get closer, but I agree that this will help it bring in even more subscribers in the future. "House of Cards" will star Kevin Spacey, and it is creating a new season of comedy series "Arrested Development." These will be coming out later this year and in 2013, and the anticipated quality of these and other original shows already demonstrates that Netflix's streaming services will only continue to improve.

This should help it trounce's (NASDAQ:AMZN) Prime streaming services. Amazon is planning to create four original shows, but these are mostly comedies and all came from a "public call" for scripts. In some superficial ways, Amazon may be keeping up with Netflix, but I think original content will be another example where it just cannot compete in terms of quality. Netflix is being careful to produce good original content, and I do not see evidence that Amazon is doing the same.

With all this good news, of course, there is also something to be concerned about, although it initially sounds a lot worse than I think it really is. The talk about debt for Netflix is that it has kept $3.68 billion in commitments and contingencies off its balance sheet. Over $700 million will even be due by the end of the year. The reason it can do this is that the titles are not yet available for streaming, so the commitments do not need to go on the balance sheet. These "mysterious commitments" do force investors to put some faith in Netflix, but it does show that there is more in store for Netflix than we may even know about. As the improved streaming viewership was such a major part of Netflix's recent boom in the stock market, it should actually be good news that it is continuing to work to provide better services.

The possible "debt," therefore, should not concern investors such a great deal. It just means that Netflix is continuing to work on growth, and as always, investors should pay close attention to how effective its attempts are growth will be. Its streaming services have seen increases in viewership, and all signs seem to indicate that streaming will continue to take business away from cable companies like Comcast, Dish, and DirecTV. Even Amazon seems unable to keep up with Netflix, so I think this is much more than just an isolated surge in viewership. Mahaney's target of $130 is probably a good one to keep in mind as you decide what to do with the stock, and I certainly do not think Netflix's run in the market is over. In fact, I think Netflix would even make a good long-term investment now. With all this in mind, I recommend investing in Netflix today.

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

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