Netflix: Limited Downside, Significant Upside

| About: Netflix, Inc. (NFLX)

Company Background

Netflix (NASDAQ:NFLX) is a pioneer in the field of subscription internet streaming of television shows and movies. It is still the only recognizable name in its particular niche and offers a unique product. The company operates both domestically in the United States and in the international marketplace.

Netflix's price per share has collapsed since July 2011, falling from a high of $304.79 per share to just $74.59 per share currently. It recently recorded its first loss in seven years in its first quarterly statement of 2012.

International Expansion

Despite this negative quarter for Netflix, people investing in the stock should be confident about its future. Over the past year, Netflix has embraced the international marketplace, something which certainly hasn't benefited it over the short run, but will definitely provide healthy growth over the long run.

Netflix has embraced Latin America recently, expanding its presence in both Central and South America in countries such as Mexico and Brazil. It has also created the option of using it in Spanish and Portuguese, allowing it to benefit from a much larger consumer base. This bodes well for the future for Netflix and shows a productive approach by the management to make Netflix an international company and not just a U.S. company.

Industry Trends

The industry which Netflix operates in can be describes as the larger movie and television industry as Netflix is a key cog in the industry supply chain. This year has seen movies consistently set new box office records, of note is Avengers, which looks set to top a whole range of box office records. This is important to Netflix because it indicates the large growth that is to come in the larger industry as a whole. People are increasingly looking to the TV and computer for entertainment and Netflix offers a very attractive service to facilitate this.

Macro Trends

As the economy recovers, demand for its products is certain to rise as people have more disposable income to use on luxuries such as Netflix's product. As it is a monthly subscription people are more likely to consider it as rather then paying a large lump sum payment, you can pay in consistent monthly payments which is more attractive for the average consumer who draws a fixed salary.


One of Netflix's key competitors, albeit indirectly, is Apple (NASDAQ:AAPL), a competitor which no successful firm would want to have right now. Apple's iTunes store offers an alternative to the product Netflix is selling. However, Apple offers individual movies and TV shows at significantly higher prices then subscription to Netflix costs every month, which is ludicrous to consider. It is equally baffling why people would buy the products Apple are selling over the product Netflix is selling.

The answer is quite simple: Apple offers a much wider range of products then Netflix. Therefore, they attract very different types of consumers, so do not particularly infringe on each other market space. Furthermore, interestingly enough, Apple also facilitates Netflix's operations as most of Netflix's users access Netflix through Apple's products, the iPad and the Mac.

A potential problem might arise if companies such as Google (NASDAQ:GOOG) or Amazon (NASDAQ:AMZN) decide to enter this increasingly profitable niche market. However, this is not too significant a consideration as they have other projects which are definitely of larger important to them right now. In Google's case: driverless cars and augmented reality glasses; in Amazon's case: facing the challenge posed by an increasingly expansive eBay (NASDAQ:EBAY).

Netflix will face stiff competition in the international marketplace. However, this is not likely to play a big role as not many significant players have managed to enter Netflix's niche so it will probably encounter indirect competition as its main problem.

Netflix's Options

Netflix has a variety of ways it could expand and increase profits. It could easily increase the price of its product by at least 20% as it is so much cheaper then other suppliers such as Apple. It could also change its login system so every time you go on Netflix you have to login. This could instantly hugely increase its profits, because many people who use Netflix do so through other people's accounts, which they stay logged into. Stopping this problem would increase their profits, as people would have more incentive to create their own accounts, and having used Netflix, they would realize how good it is compared to similar services.

One of Netflix's biggest problems is that it does not offer a particularly wide range of movies. Hiking up the price would enable them to get more revenue, they could do this on a promise that they would use the money to diversify their movies, in particular, tackling the largest, high-grossing movies, which they do not have currently. This would increase the value of the product and attract many new consumers.


Simply, Netflix is already a great product within huge potential. I personally have the product, and it is a very good product. If the management focuses on combating the problems Netflix faces, it could easily go back up into the hundreds over the coming months. If not, it is still undervalued, in my opinion. The future is bright for Netflix, and it is a very good buy at current prices.

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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