Tickers in this Article: NFLX, BBI
Recessions are good for a few companies - mainly the ones who have broke or unemployed consumers captivated on their couches. This appears to be the case for Netflix (Nasdaq:NFLX), which just upped its first-quarter guidance based on anticipated subscriber growth of 8.16-8.26 million, above the previously expected range of 7.85-8.05 million.

Other good news included raised first-quarter profit expectations of 15-22 cents per share from a 13-21 cents, and higher full-year profits of $1.18-1.30 per share, up from the previously announced $1.12-1.24 per share. So, what's up with this increased optimism? Is a looming recession and slowed consumer spending really the catalyst the stock needs to take off?

Act I: Rise of the Recession
Fact is, many consumers are either tapped out, or are pinching pennies in the wake of a struggling economy and rising gas prices. In the present business environment, companies that cater to cheap entertainment for consumers could profit handsomely.

It's important to note that Netflix did not directly attribute the earnings guidance increase to the economy. Instead, in the press release, the company stated, "Revised guidance for the full year 2008 for GAAP net income and GAAP EPS reflects the impact on interest income and weighted average common shares outstanding of the completion of the $100 million stock repurchase program announced earlier this year." Netflix bought back 3.8 million shares at an average price of $25.96 per share, net of expenses.

However, savvy investors have also taken note of the revised numbers in subscriber growth. While the buyback has helped, the cold hard truth is the company is seeing higher subscriber growth because many American's just don't have extra cash laying around for more expensive entertainment alternatives. Considering Netflix is the World's largest online movie rental service, with the cheapest plan starting at a meager $4.99 a month, it's no wonder subscriptions are up, especially since most people are up to their eyeballs in credit card debt. (If you're drowning in red ink, see Expert Tips For Cutting Credit Card Debt.)

Act II: Killer Credit Storms America
The Federal Reserve recently reported that revolving consumer debt has now reached $943.5 billion. In December, the Fed's report showed annual revolving debt growth slowing to 2.7% from November's 13.7%. But really, it's more like consumers are so tapped out with debt, many can't even get any more new credit cards. At the end of the day, the credit crunch, coupled with Americans' habit of spending much more than they save might just be the wicked slap in the face many need. (For related reading, check out Stop Keeping Up With The Joneses - They're Broke.)

The truly sad part is so may debt-burdened Americans will have trouble filing for bankruptcy, too. On April 20, 2005, President Bush signed the single largest bankruptcy law rewrite in the history of the country. And it wasn't good for middle class earners.

According to the Associated Press, the legislation mandates, "[Americans] with income above their state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would then order a repayment plan." What it all means is that reckless middle-class spenders won't be able to skip out on their credit card obligations, even if they want to, at least not easily anyway. Regardless, all of this points back to a likely increase in the demand for cheap entertainment. (For more on the changes, see Changing The Face Of Bankruptcy.)

Act III: Evil Villain Revealed: Overhead
Looking ahead, more guidance in the movie rental biz will come from Blockbuster (NYSE:BBI), which will report fourth-quarter 2007 results on March 6. In the earnings report, the company could easily announce the closure of some of its retail stores. After all, they're costly and require human operators, while Netflix's model is showing that both internet viewing and mailed-in movies are big hits with consumers. Transition could be in the cards.

This would not be a complete surprise, since in early February video rental competitor Movie Gallery (OTC:MOVIQ) stated that it would close another 400 stores - taking the total to 920 - as the company attempts to swim out of bankruptcy. Movie Gallery is the No.2 retail chain behind Blockbuster. However, much of the company's problems stemmed from taking on too much debt from purchasing Hollywood Entertainment in 2005.

Coming Soon
What we're really seeing is an internet and consumer-ease related paradigm shift within the industry. It's true some consumers will always prefer to go to the actual video-rental shop and peruse the titles, but Netflix's revised guidance numbers clearly show that many consumers prefer the lower cost mail-in or internet options. The bottom line is, if consumers continue to love Netflix, so will Wall Street.

comments powered by Disqus

Trading Center