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.
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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.
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.