Shares of digital movie subscription service, Netflix (NFLX: Charts, News, Offers), have recently soared to all-time highs, closing in on $170 per share with a staggering P/E of 67.23. The company, which provides streaming movie and television services and DVD rentals by mail to more than 12 million subscribers, is without a doubt one of the hottest stocks right now, but has it gotten ahead of itself?
Daily Chart
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
The company expects to finish the year with 18 million subscribers and 29.5 million by the end of 2012. Those are incredibly lofty expectations from its current count of 12 million. It expects revenue of 2.15 billion this year. The market has reacted in kind by tripling the stock price throughout 2010 in expectations for some serious growth. If you are an investor who sees Netflix as a perfect candidate for a short, you are not alone. Short interest in the stock has risen 64% since June and represents 28% of the company’s floating shares. Of course, Netflix bulls, who will likely compare the stock to Apple’s (AAPL: Charts, News, Offers) growth pattern, believe that prolonged bullish pressure will lead to a massive short cover which will propel the stock price into an even higher trading range.
Netflix is at a crossroads, with its core DVD mail rental business being replaced by streaming video, the domain of cable, satellite and telecommunications providers. This shift in focus will bring Netflix squarely into the crosshairs of some massive market heavyweights – such as Time Warner (TWX: Charts, News, Offers), Comcast (CMCSA: Charts, News, Offers), Apple, Google (GOOG: Charts, News, Offers) and Amazon (AMZN: Charts, News, Offers). With a market capitalization of 8.7 billion, it is particularly vulnerable to a hostile takeover by any of the above should pleasant cooperation fail. A shift to streaming media may be sound on paper, as it cuts out shipping costs and physical media costs, strengthening margins considerably, but it is unpredictable. Investors need only to recall Hulu and Youtube’s revenue and licensing struggles to remember the added difficulties of streaming online. Currently 61% of Netflix subscribers use the streaming services, and it is estimated that 17% of these users use the service as a cheaper alternative to cable or satellite TV. Its current variety of subscription plans have no due dates, late fees, shipping fees or pay-per-view fees. The company’s consistent plan is to provide these rentals, both physical and streaming, to the home user for a flat rate of $8.99 per month. This may all change if cable or satellite providers decide to cut prices in order to defend their market share. However, if the company plays its cards right and grows intelligently, it could eventually evolve into a media giant.
For now, there are several immediate challenges and costs that may hurt the company’s bottom line. A $1 billion five-year deal with premium content provider Epix has been criticized as expensive, considering the other cheaper content channels Netflix could work with. The company’s premium partner, Starz, has been caught in a tug and war between Netflix and Disney, with the latter beginning to gain exclusive access to some Starz content and cutting Netflix out of the loop. A renewal with Starz, with has not yet been confirmed by Netflix, will result in a much higher payout for Starz, up to $75-$100 million yearly from its current $25 million yearly contract. The company was also forced to kowtow to Warner Brothers by applying its first ever due dates and late fees on Warner DVDs in exchange for a wider variety of Warner DVD and Blu-ray releases. In addition, Warner has denied Netflix subscriptions to its popular premium HBO shows, including True Blood and Entourage. Higher postage rates in 2011 are also forecast to impact the company, which mails out an estimated two million DVDs daily.
Going forward, analysts believe that Netflix could support a $1-$2 hike in its $8.99 monthly fee with minimal impact on its subscriber base, which would reduce the margin pressures caused by the aforementioned deals with premium content providers. In addition to the current TiVo players, video game consoles and other Internet-enabled media devices, there is a slew of new Netflix-enabled devices flooding the marketplace, including Blu-ray players, Internet-enabled TVs such as the upcoming Google TV and an upcoming deal with the struggling Apple TV platform. In addition, mobile apps, such as the ones available for Apple’s iOS devices, upcoming ones for Google’s Android and Windows Mobile 7, will increase Netflix’s digital footprint considerably.
While Netflix undoubtedly has many resources and widespread areas of growth, do any of these justify its current stock valuation? Perhaps it would be prudent to wait for a pullback or the company’s next earnings report, scheduled for October 20, to see if the company’s growth can stay in line with its sky-high expectations.
Other News About NFLX
How high can Netflix (NFLX) go? – A bubble ready to pop?
Blockbuster Bankruptcy: Good or Bad for Netflix? – Blockbuster goes down in flames, but is this good for Netflix? – (NFLX: Charts, News, Offers), (BBI: Charts, News, Offers)
Other Stocks in the News
General Electric (GE) – Q3 2010 Earnings Preview – Can the oldest stock in the DOW bounce back? – (GE: Charts, News, Offers)
Massive Fisher Price Recall: More Than 10M Toys – Fisher Price hit by a massive safety recall. – (MAT: Charts, News, Offers)
Copyright 2010 by Investorguide.com, Inc. Investorguide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary, and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. One WebFinance Inc. employee, other than the author of this issue, owns shares in NFLX.
The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA Investorguide.com, Inc.) or its employees responsible.
Other relevant articles you may like
Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
