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Where is Netflix headed from here?

|Includes: AAPL, AMZN, Netflix, Inc. (NFLX)

The last 2 years were very interesting for Netflix (NASDAQ:NFLX). First, it had a massive rally that lasted for more than a year and then it had a massive plunge. Starting 2012, the stock started rising again. Many investors do not know what to do with this stock anymore and they simply avoid it. Let's look at what Netflix is doing recently and whether it is working. 

First some short history. In the beginning of 2010 Netflix shares traded for 53 dollars each. By the end of 2010, they were traded for 179 dollars, and when they peaked in July of 2011, they were traded for 295 dollars. This is an impressive growth in a very short time and many investors were very satisfied with it, until the stock saw a plunge which took down. First, the stock plunged to 241 dollars by August 5th. Many people thought the company would be headed for crash, others thought it was a great buying opportunity. Then came another crash on August 19, carrying the stock price so 205 dollars. This was followed by another crash that lasted for a few days and resulted in a new stock price of 113 dollars by the end of September. By the end of November, the stock price was 63 dollars. Of course, when the stock was down at 63 dollars, there were 2 ideas about it: 1) it is going to crash till the value goes down to zero, 2) this is great valuation, it can only go up from here. Luckily the fall stabilized and the stock price climbed up to 103 dollars in the following weeks.

And now what? Did the stock find its fair value? Will it go up? Down? I think it the stock can keep growing in value as long as we don't keep in mind the two things about the company: 1) the growing competition and 2) CEO's bad PR skills. 

Let's talk about competition first. Many big players have invested a lot of money to compete with Netflix in the past. Some have failed, some are failing, and some are doing better than others. Currently, the biggest threat to Netflix's market share is seen as Amazon (NASDAQ:AMZN). Apple (NASDAQ:AAPL) is also in the business of selling/renting movies on Itunes, but apart from a few mess ups from Netflix such as sudden price hikes, I don't see them stealing many of Netflix' clients unless they offer something completely different and unique that Netflix doesn't offer. In the future Hulu may offer a competition to Netflix but a lot of Hulu's income will come from advertisements rather than member subscriptions. Netflix has a very attractive subscription model of paying one fee and seeing unlimited content and I don't see many companies matching that. 

As much as Netflix CEO's bad PR skills go, I am not very confident with that. The guy has the ability to say the worst things at the worst time, then apologize in the worst way causing even more panic. Yes, we all appreciate his honesty and the ability to admit it when he "messes up" but if he does that too often, it will ruin the investor confidence in the company. Fact is, a company's market share is mostly composed of investors sentiments around that company. I would say 80% of a market's value comes from people's sentiments and expectations, whereas the rest 20% comes from fundamentals and technicals. 

Lately Netflix has been doing some of the right things such as investing overseas to increase its market. I believe that the company's investments in the UK will prove to be very profitable. The company is also actively seeking to get new material at affordable prices. Netflix has put a lot of local stores and competitors out of business and it may continue to do so, but I think what will determine where the share price is heading to will be investor confidence. Once the company re-establishes confidence of its shareholders and other market participants, it will become valuable again. Many investors are rightly concerned after having seen the tech bubble and they don't want to get burned again. In fact, anyone who bought Netflix shares in the first half of 2011 are probably still hurt from the plunges they saw. 

In the short term I would be very cautious with trading Netflix. Once the investor confidence comes back, I might consider jumping in, but we are not there yet.

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