Question: Can Netflix Hit $100 Again?
It's been a wild ride for Netflix (Nasdaq:NFLX). Once a darling of the "growth at any cost" crowd, Netflix stock enjoyed a rocket ride from late 2008 to mid-2011 that took it over $300 a share. Then came the "Apocaflix" strategic shift/marketing nightmare that not only confused and alienated customers, but dramatically dented investor and analyst confidence in the story. So now the question before is whether Netflix can hit $100 again. For those of you also considering this question, here's what I believe to be the main arguments for a bull case for Netflix reaching that level again.
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The Streaming Opportunity
Netflix was one of the first movers into subscription-based streamed video on demand, and there is significant room to grow this business. Not only is streaming content likely to replace DVD players eventually, at least when it comes to the living room TV, but the spread of devices like tablets seems like a great opportunity for a company like Netflix.
In fact, if cable companies continue to stubbornly refuse to allow customers to move to a more a la carte model (picking and choosing the channels they want to watch and pay for), there's a chance that subscription-based streaming video could replace cable TV in many homes, which means more than 50 million potential subscribers (though many of Netflix's current 16 million subscribers are likely included in that base of cable subs).
With a rich library and attractive pricing, the subscription streaming market should be Netflix's to lose. The company has also built a recognized brand and those subscribers who have stuck with the company seem pretty loyal, if numerous third-party surveys are to be believed.
SEE: What's Next For Netflix?
Is the Competition As Formidable As Believed?
One of the most commonly cited bear arguments against Netflix is that competition is going to crush Netflix - whether from Apple (Nasdaq:AAPL), Amazon (Nasdaq:AMZN), Hulu, Comcast (Nasdaq:CMCSA) or other market entrants. After all, content is content - as long as the connection works and a rich library is available, it doesn't really matter to most people where the stream comes from.
Apple's iTunes has certainly been a success, but the company's current a la carte model makes it a relatively expensive option. Moreover, hardware compatibility can be an issue. Last and not least, Apple has acquired a rep for being a tough company to deal with and content owners may sidestep Apple in favor of working with more compliant partners.
Amazon could definitely be a bigger threat. The price for a subscription to Amazon Prime compares very favorably (though it is an annual subscription), but the library is not quite as good and hardware compatibility is an issue here as well. What's more, I'm not sure Amazon can indefinitely pursue a low-price model. Eventually, investors are going to demand that the company earn a better return on its business or the multiples will start to collapse.
SEE: Four Online Shopping Alternatives To Amazon
International Expansion and Exclusive Content
Netflix is really just starting to expand into international markets. While there will be formidable competition here as well (from cable and satellite TV companies, Apple, Amazon, and so on), the market is under-penetrated and the better Internet infrastructure in many of these markets should facilitate more rapid adoption of streaming video. Better still, Netflix should be able to use its profitable U.S. businesses (streaming and DVD) to help fund this expansion.
Exclusive content could also be another valuable differentiating factor. More than a few cable TV channels have transformed themselves from almost indistinguishable broadcasters of old TV show and movies to destination viewing spots for original programming. Think of where networks like USA Network and Bravo (both owned by Comcast and General Electric (NYSE:GE)) or AMC (owned by AMC Networks (Nasdaq:AMCX)) were just ten years ago and where they sit today in terms of viewership and ad revenue as a product of introducing popular original series. If Netflix could create similar hit programs, it's not unthinkable that these companies could attract subs on that basis alone.
SEE: 7 Ways To Expand Your Home-Based Business
The Bottom Line
Although I do not personally see myself buying these shares, I think there is a credible bull case on these shares. With Netflix's price around $82 as of this writing, it doesn't seem hard to argue that these shares could hit $100 again. Sell-side estimates continue to call for double-digit sales growth for several years, and renewed momentum in subscriber numbers could quickly turn sentiment around on this former growth darling.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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