Netflix (NFLX) has had an impressive run recently. The stock fell out of favor last year and experienced a very steep price decline of over 52%. The company has decided to make some changes in strategy, and these changes are getting a very positive reading from the capital markets. The question is whether or not this run is sustainable, and how Netflix will perform in an environment of improved perception.
Netflix's common shares trade around $67, between a 52-week range of $52.81 and $133.43. Earnings per share (EPS) are $1.82. The price earnings ratio is 31.06. Netflix does not currently pay a dividend. The company has total cash of $813.34 million and total debt of $400 million. The year-over-year quarterly earnings growth is at negative -91%. The company has $1.43 to cover every $1 in debt it currently holds. Netflix currently has a book value of $12.39 per share. 87.4% of Netflix is owned by institutions, and 5.05% is owned by insiders. 28.7% of the float is short as of September 15th, 2012.
Netflix currently has 27.5 million streaming customers globally and 9.2 million DVD subscriptions. It lost 850,000 DVD subscribers last quarter and gained 1.09 million worldwide users in movie and TV-show streaming in the last quarter. Competing products include Amazon.com's (AMZN) Prime service and Hulu, which is owned in part by NBC Universal (GE) and Comcast (CMCSA) and News Corp. (NWS) and a private equity group. Sometimes Coinstar's (CSTR) Red Box service is mentioned in the same category, but it really only rents DVD's from kiosks, so the only similarity is its likeness in DVD rentals, but customers only get the content for a limited period of time in order to view it.
Netflix's model is similar to Amazon's in that it relies on size and a growing subscriber base to remain relevant and sustain its business. For a fixed monthly price you can stream and view as much or as little programming as you like. Netflix has approximately 100,000 titles for viewing. Amazon has approximately 160,000 titles to rent or buy. Hulu does not publish its library size, but it has content deals with NBC Universal, Fox Broadcasting and updates its television titles often. Time Warner (TWX), which owns HBO, Walt Disney (DIS) and NBC Universal, all have huge libraries of content and create original content to feed the demand from cable subscribers and streaming customers.
The original concept of the price of a movie ticket was to make the price of the ticket equivalent to one hour's wage. Through the years ticket prices have fluctuated above and below the hourly wage rate. Ticket prices for a single viewing in a theatre got away from being tied to wages sometime in the 1990's and ticket prices are now as much as $25 for first run viewing of 3D movies. The prospect of an evening out is no longer a cheap way to be entertained. The proliferation content offered by cable providers, the presence of mobile devices and tablets that can be used for online streaming everywhere have presented cost effective ways for audiences to be entertained.
Media companies always struggle with content issues. I thought some time ago that Netflix's business would start to suffer when the available content started to diminish against the number of subscribers demanding new and plentiful options for viewing. There are a myriad of problems associated with acquiring content, not the least of which is quality. There are a myriad of issues being a content creator, not the least of which is finding distribution outlets to monetize the content. Netflix provides an answer to the distribution issue, which opens it up to a number of different avenues to obtain content. Netflix and content producers need each other and form a symbiotic relationship. Netflix survival is as dependent of subscriber growth as it is on content. Netflix made a strategic decision to expand its market reach and made expenditures to expand in global markets. This strategy is to the detriment of its earnings growth, it is also the same as Amazon's which has survived by expanding its reach and its product offerings.
Netflix has to use its skill at managing data that predicts market trends, continue to offer compelling content and not lose track of its ability to expand its subscriber base. Yahoo (YHOO) and Google (GOOG) rely on web traffic created from the origins of the business plans as web browsers to grow content streaming. Yahoo is caught up in what it is and where it is going. It is hard for it to find its footing with a corporate description that invites a more questions than answers. Google has Youtube which is generating a lot of traffic, but it is still reliant on its search engine capabilities and is focusing on mobile applications through its acquisition of Motorola.
Some fund managers think that Netflix is due to rise to around $120. I'm not sure I'd go that far, but there is an element of rising from the ashes here. It has evolved well into an online business that offers old, new and different content at a competitive price. While its services can replace existing cable at a much better price, there are many who use it to augment cable services and it has the subscribers to prove it.
The business has been public since 2002 when its mandate was to be better than Blockbuster with no late fees. The company has a lot of competition from Hulu and Time Warner which own a massive amount of acquired and originally produced content. The big draw with Netflix is its online anytime, all the time viewing possibilities. Netflix stock was on a skyrocketing trajectory before the Qwikster era. This recent run up is a result of some exuberance and some misguided comparisons to market demand. While I think Netflix has some room to move here, I caution retail investors for the simple reason that only approximately 8% of the float is available. Secondly, the company will be looking to finance its expansion through either debt or equity, in either case, a higher stock price is better for the company at present and large holding groups have a way of making that happen in the short-term. The recent stock price increase may have been the result of a short squeeze - which worked. If the stock is going to correct, it will correct soon, which will present a buying opportunity to new investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.