Recession? What recession? Judging by its fourth quarter numbers released Monday, Netflix (Nasdaq:NFLX) doesn't seem to be bothered by the economic slowdown. On the contrary: the DVD rental service provider tacked on another 718,000 subscribers in Q4, bringing the total number of subscribers to 9,390,000. Revenues jumped a whopping 19% from a year earlier and net profits did even better, soaring 45%. Management expects the strong performance to continue in the coming quarters. So too does the market, which pushed up Netflix shares more than 20% this week.
IN PICTURES: Retire A Millionaire In 10 Steps

Netflix still remains a good stock to own in today's slumping economy. While the shares may not rise at the same swift pace we saw this week, investors should be rewarded as the company heads through 2009.

Like Walmart, McDonalds and other companies that successfully offer low prices in their industries, Netflix is gaining from the recession. Penny-pinching consumers are forgoing trips to the cinema and cable TV packages and are turning to Netflix's less-pricey offerings. For less than the price of a pair of movie tickets, subscribers can choose from thousands of movies delivered to them through rental or web based streaming. A standard monthly Comcast (NYSE:CMCSA) cable bill comes to about $55.00; the average Netflix subscriber forks over just $13.58 per month.

Kudos goes to Netflix CEO Reed Hastings for boosting operational efficiencies. 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 $26.67 from $34.58 a year ago. More customers are streaming 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 for Netflix.

The stock is now trading on a forward price to earnings multiple of 20. In this market, that may sound steep, but even if earnings growth is only half the rate Netflix produced in Q3 and Q4, that multiple is warranted. Of course, Blockbuster (NYQ:BBI) trades on a forward earnings multiple of less than five, yet in the last two quarters the video retailer suffered from shrinking revenues and bottom line losses while its debt level is almost four times that of its market cap. By my reckoning, Amazon (Nasdaq:AMZN) represents the most appropriate benchmark stock. The online mail-order retailer is valued at nearly 35 times next year's earnings - a 75% premium to Netflix. Netflix stock has room to grow.

Bottom Line
Admittedly, Netflix has its share of competition. Besides vying with cable operators, such as Comcast and Time Warner Cable (NYSE:TWC), the company will have to contend with telecom giants Verizon (NYSE:VZ) and AT&T (NYSE:T), which are rolling-out their own high-speed video services. What's more, Amazon is quickly building a position in movies-on-demand, as is Apple (NYSE:AAPL) via its iTunes platform.

Competition is bound to grow, but that's no reason to rule-out Netflix. Sitting on approximately $140 million in cash and annual free cash flow of about $95 million, Netflix has the resources to build its brand, expand its digital content and hit its target of 10.6-11.3 million subscribers by the end of 2009. With numbers like that, Netflix won't just be a popular destination for movie watchers, but it may also become a prize possession for a bigger competitor looking to quickly build its foothold in the market.

For most companies, 2009 will be a tough year. For Netflix, and its investors, it could be a great one.

Related Articles
  1. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  3. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  4. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  5. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  6. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  7. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  10. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  1. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  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. 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 >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!