Time to revisit my frequent facination with Netflix – both as an investor and as a subscriber. As I have covered in this blog in the past, I have been both a very happy investor and customer of Netflix almost since the beginning of the company, and I have equally been a big critic of their silly management and customer service moves. In fact, last year I happily sold my stock at it’s near high when Netflix management made a big stumble and attempted to separate their DVD delivery service from their streaming service. Investors and customers left in flocks, and Netflix’s share price plummeted.
But yesterday Netflix made a serious rebound, making a 22% pop after the company announced strong earnings and a lot of new subscribers. And the jubilation continued today, with another $7.00 per share increase, closing at $124. The company is nowhere near it’s historic 52 week high of $305, but this is a great showing. But is Netflix worth it? Lets take a look at a few indicators:
Valuation. Well, for starters they are trading at a 29 price to earnings ratio – high by most industry’s standards, but if they are still classified as a tech company with a lot of room to grow you could make the argument it is reasonable. Really reasonable if you compare them to some of the current new tech offerings. LinkedIn trades at a 1430 PE ratio. Groupon’s PE ratio can’t even be calculated because they have never made a profit and from all indications have no intention of doing so in the near future.
Growth Potential. Netflix fans say they have barely scratched the surface. There is a huge international market they have yet to address with their core home delivery business, and their streaming service is now a fixture on every conceiveable new streaming device. Think of all the iPads, new televisions, DVD players, and other streaming devices that were just purchased in the last 60 days. Most of them come “Netflix enabled”, which could mean huge continued growth for the company.
Competition. This is an area that needs to be divided into two sectors; home DVD delivery, and streaming delivery. In the home DVD delivery arena I thought Netflix might actually have a competitor for a few fleeting moments when Dish bought the remants of Blockbuster. A few months ago Blockbuster hit the airwaves with a compelling advertising campaign highlighting their price and new release advantage over Netflix, and I once again signed up to give it a try. With a lower price, and a 28 day new release advantage over Netflix on many titles, Blockbuster had the potential to be a real contender, but I can tell you that after using the service for a month Netflix has nothing to worry about. “Big hat – no cattle”, is how I would describe Blockbuster. They say they have the new DVDs faster than Netflix, but unfortunately they don’t have enough inventory and are unable to ship them, so right now of the twenty or so movies I have in my queue, fifteen show “long wait”. Also, Blockbuster’s website is amazingly clunky and slow. For some reason they put a “shuffle” feature on your queue, but often the site chooses to shuffle your movies on its own, moving the good releases to the bottom of the list and putting those movies you really don’t want to see but felt you had to add to fill up the list at the top. Finally, they don’t seem to have the physical infrastructure. I returned movies three days ago, and they still have not shipped replacements. When I sent an e mail to ask why, they replied that different movies come from different distribution centers, and sometimes it takes a couple days to ship, and then a couple more days for the movies to arrive. Netflix might throttle you and not have the latest releases, but their distribution platform is incredible and their website a delight to use. You will always have movies.
In the streaming arena things are a bit different. Netflix has great technology, but at least at this point their content is still only average. A lot of the great movies are not available to stream. There is also a lot of competition. Since I am a HBO subscriber I tend to use their streaming AP, which basically contains almost all the great stuff HBO has ever broadcast. I also use the ABC AP, and their are dozens of other services from cable providers and companies like Hulu that really rival Netflix in terms of content and usability, so consumers have a lot of choices before signing up for Netflix.
But the real key – both positive and negative – could be Netflix’s incredible penetration into the streaming device catagory. One of the reasons for Neflix’s pop over the last few days was the announcement that they had added a half million subscribers since Christmas. This is not suprising when you consider all the iPads, iPhones, web-equipped televisions, blue-ray DVD players, and other devices that either came equipped or have easy-to-install APS for Netflix access. But one of the problems is that most of those 500,000 people took advantage of a free one month membership Netflix offers, so the real test is how many of those new subscribers remain and pay in the coming months. Having a lot of people that use your service for free is not a good business model. For instance, when I signed up for Blockbuster they gave me a free month, but the service is so bad I won’t remain a customer, and they will lose money on me.
So the big questions….
Should you buy Netflix? Probably, but it depends on your time horizon and risk aversion. This company can be a really bumpy ride, and while I normally like good companies that you can hold, this has not been one of those stocks. I have done well by actively trading it on the bumps. Keep in mind that in the last year the stock price has ranged from $62 to $305 – so depending on when you bought you could be very happy, or a Netflix-hater. Still, at least in the near future, things look pretty rosy. While ultimately DVDs and accordingly their home deliver business will go away, there are still a lot of people that love their service, and plenty of potential international expansion. They have a predominate position in spreading their streaming technology, and I suspect their content will get better and better. In other words, they have a very valid short and long term business model and infrastructure that makes me like them, and I will continue to buy and sell the stock appropriately.
Should you sign up as a customer? If you want home DVD delivery, the answer is yes. While their throttling and slow release dates are frustrating, there is no better option. I am less enthusiastic about their streaming service. At this point I can find better content with no additional monthly fee.