Netflix (Nasdaq:NFLX), the mail-order and streaming video rental company, delivered solid second-quarter numbers on Thursday, matching Wall Street analysts' sales expectations and topping earnings forecasts.
Still, the market - skittish about the cloudy outlook for the economy in general and Netflix's streaming video business - knocked the stock down about 10%.

7 Tools Of The Trade

Room to Rise
I'd say the stock is still an investment story that merits consideration. Netflix, unlike a lot of other media and entertainment stocks out there, is debt free, remains a prodigious free cash flow producer, and has an appealing valuation when you consider its rapid growth rate.

Now priced at about $42, the stock has room to go higher. Netflix trades on a forward price-to-earnings multiple of about 20, while its earnings are expected to see growth as high as 30% this year. I think that this is an attractive valuation. (For further reading, check out Making A Winning Long-Term Stock Pick)

Benefiting from Downturn
If anything, the tough economic environment will continue to benefit Netflix. Cost-conscious consumers, forgoing trips to the cinema and pricey cable TV packages, are taking advantage of Netflix's cheaper offerings. For less than the price of a pair of movie tickets, consumers can choose from thousands of movies delivered to them through rental or web-based streaming. Comcast (NYSE:CMCSA), for instance, has a promotional price of $39.99 per month for digital cable, while the average Netflix subscriber forks out less than $14.00 per month. Not surprisngly, Netflix ended the second quarter with more than 10.6 million subscribers, up 289,000 from the first quarter.

Still, Wall Street is awfully nervous about the prospects of Netflix streaming video service. After all, while Netflix offers unlimited videos to its streaming subscribers, it still must pay rights fees on that stream to the studios. Longer term, that could prove costly.

All the same, costs for Netflix just keep falling. Indeed, Netflix is spending less money to bring in each additional dollar of revenue. While its technology and marketing costs grew in the last quarter, the total cost of adding a new subscriber fell to $23.88 in the second quarter from $28.89 for the same period in 2008, and $25.79 for the first quarter of 2009. (For more, see Equity Valuation In Good Times And Bad)

Costs per subscriber fall as more customers stream content to their personal computers and set-top boxes rather than having DVDs shipped to their homes. As streaming gains momentum, it will translate into even lower costs and higher profits.

Here's some early proof: Free cash flow for the second quarter was $26.3 million compared to $12.7 million in the second quarter of 2008 and $15.1 million for the first quarter of 2009.

DVD kiosks from privately-owned Redbox pose a challenge to Netflix, although RedBox is limited to new releases, and is more likely to hurt Blockbuster (NYSE:BBI). More worrying is competition from online video services such as Amazon (NYSE:AMZN), Apple (Nasdaq:AAPL) and Hulu, a joint venture from General Electric Co. (NYSE:GE), Walt Disney & Co. (NYSE:DIS) and New Corp. (NYSE:NWS).

Bottom Line
But looking at Netflix's performance so far, it's hard to find the competition having much of an impact right now. If anything, competition in the space could prove to be a positive for Netflix's valuation as big media groups see acquisitions as a faster, more reliable approach to expand their video market presence.

Despite the market's pessimism, Netflix could be a stock worth owning through 2009.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center