What should investors make of Netflix Inc.? Investors don’t know whether the glass is half-full or half-empty when they ponder the stock’s topsy-turvy movements.
Netflix Inc. (Nasdaq:NFLX) stock has generated spectacular rises over the past year, gaining more than 146%. That’s the good news. If you got in early enough, you could have visions of the proverbial customers’ yachts dancing through your head.
The stock culminated a wonderful 2013 by closing at a record high of $380.58 on Dec. 23. It was a Merry Christmas, indeed, if you happened to be holding NFLX on that festive date.
But then …
Netflix started 2014 by falling 7%. On Jan. 10, the stock limped to a two-month low of $332.14. Two short weeks later the stock rebounded and managed to notch a new all-time high on January 31.
How are we as investors supposed to make sense of this volatility? If Netflix’s management has anything to say about it, the recent strength will continue despite market-wide profit-taking amongst many investors. Reed Hastings, the CEO, and his team understand the first rule of management: manage for the long haul, and not for short-term gains to artificially goose the stock price.
“Simply put, the best way to stay in the good graces of Wall Street is to focus on the business, not the stock price,” said Sam Hill, a CEO consultant and the author of “Radical Marketing: From Harvard to Harley, Lessons from Ten That Broke the Rules and Made It Big.”
“Trying to manage a business to keep the analysts happy is like dancing while watching your feet,” Hill said. “It really doesn’t help. Look, the analysts will never stay happy. It’s their job not to be happy, but to ask more and more of management. Netflix has done a remarkable job of completely reinventing two industries—movie rental and scripted programming. If they keep coming up with ideas like that, the analysts will continue to be happy.”
At the same time, if Hastings & Co. become fixated on ways to prop up the company's stock price, then they won’t be concentrating on managing the business for growth.
This stock represents Wall Street’s ultimate parlor game. There is no consensus on the company, which was written off for dead only three summers ago because of a questionable decision to raise its prices during a prolonged U.S. economic slump.
Then Netflix rebounded magnificently. The company produced momentum by boldly innovating. Known as a company that delivered DVDs to customers, it branched out to focus on streaming and then took a big step. It entered the content-creation business by creating two hit television series, the political thriller “House of Cards,” starring two-time Oscar winner Kevin Spacey, and the prison drama “Orange Is the New Black.”
This year Netflix shares most likely will advance, but not at the dizzying place of 2013, which accompanied a dramatic general stock-market explosion.
“NFLX is a classic momentum stock,” said Jon Maxson, a partner in Beacon Capital Management in Franklin, Tenn. “It dropped between July 2011 and July 2012 from $295 to $54, and it was up in 2013, over 300%. It will be hard for Netflix to continue climbing like this.”
Maxson said he worries that Netflix will encounter stiffer competition. “You’ll see increasing competition from Microsoft (Nasdaq:MSFT), Google (Nasdaq:GOOG), and Amazon (Nasdaq:AMZN). Ultimately, common sense tells me that stock won't go up another 300% this year. I'd be happy with 15%."
Netflix bulls can feel confident that the management is looking out for their long-term interests. “Quite frankly, if you look at the management of Netflix, I really like them,” Maxson said. “They are early adopters within their market. The competition is trying to catch up to them. Netflix recognizes the need to expand.”
Above all, investors should trust their own instincts. As James Twining, president of Financial Plan, said, “Absolutely no one, without inside information, has the slightest idea as to the magnitude or direction of the future price of Netflix or any other stock for that matter. The market price of a publicly traded security is the consensus of virtually millions of market participants, and it reflects all of the publicly known information and future expectations about the firm, both positive and negative. Almost instantly when there is a shift in perception, which is often the result of new information or events, the stock price adjusts.”
The Bottom Line
Ultimately, an investor has to trust the decisions and strategies of the company’s management. History is on the side of CEO Hastings, who seems to have a knack for both surprising and pleasing the market. Nothing is ground in stone, of course. But don’t bet against Netflix.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.