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The BULL case for NFLX

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September 19, 2011 – Comments (8) | RELATED TICKERS: NFLX

Unless you’ve been living in a cave, you’ve noticed a lot negative vibe towards Netflix lately. I might be the cheese that stands alone, but here are three key reasons that I still think Netflix is a great long-term investment:

1) International Expansion

· NFLX began streaming in Canada in September 2010. They ended the first six months of 2011 with just under 1 million subscribers in the country, which accounted for $31 million of revenue. Granted, this is small fries when compared to the 24.6MM subscriptions and $1.5 billion from the USA during the same period. But Canada’s subscription base is growing quickly. Add to that Latin America (Mexico, S. America, Caribbean) is coming online in the 2H of 2011 and that there is ‘further international expansion in 2012’. The model has proven to have translated successfully, and there is a lot of upside in international expansion.

2) Price vs Volume Tradeoff

· NFLX’s current net margin is 8.6%. We can use some Sales 101 algebra to determine the balance between Price and Volume. If we assume a 40% net price increase from their recent announcement and an unchanged cost structure (they won’t get the full 60% increase from all subscribers, due to changes in plans. See also http://boards.fool.com/1081/netflix-revises-q3-guidance-29542270.aspx?sort=whole#29542272 for a breakdown of where the subscriber count is coming from), Netflix could experience a 38% decrease in subscription volume and still keep its net income constant. With 25.6 million subscribers today, they could decrease their subscription base to only 18.4 million and still not lose a single margin dollar. This is the power of raising prices, even when you piss a few people off.

3) Forward-looking CEO

· Forget the verbiage about DVD’s being ‘dinosaurs’ or that “Qwikster” sounds like something you’d find on the breakfast aisle of the grocery store. The fact remains that online streaming is where the future market is going. Reed Hasting has been saying this for years. Yes, there will be competition from the big boys. Perhaps Qwikster will even be divested for a fair price. But NFLX is clearly focusing on the best opportunity for the business. I’m amazed at how quickly the market is willing to abandon a visionary, proven leader at the first signs of difficulty or unknown.

*All of my numbers are from the company’s most recent 10-Q.

8 Comments – Post Your Own

#1) On September 20, 2011 at 1:53 AM, awallejr (82.46) wrote:

Listen in the end it is all about content. Period. If they can deliver, which I have my concerns especially in light of the Starz turn down, then perhaps. But once a momentum stock stumbles it is time to look elsewhere. They stumbled.

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#2) On September 20, 2011 at 2:49 AM, FleaBagger (33.44) wrote:

And the deal with Disney fell through.

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#3) On September 20, 2011 at 8:23 AM, andrewkaduk (< 20) wrote:

Your #3 bullet is spot-on. I've been giggling to myself for the last 24 hours listening to everyone whipping themselves into a froth over what a bad move this is, and I think it's pure genius. DVD by mail is going to die one way or another - whether by USPS systemic failure (they're close) or simply by the antiquity of physical media. I can guarantee you that Netflix segregated their mail-based services (and customers, and their credit card numbers) specifically to make Qwikster an attractive morsel for somebody like Amazon, or Yahoo or who the heck ever to gobble up.

Yes - this is all about Netflix positioning themselves to conquer the world in the future. They are already tied into video game systems, Blu-Ray players, TV firmware, mobile devices and everything else. The only thing left is streaming content directly into our brains.

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#4) On September 20, 2011 at 8:59 AM, cbwang888 (25.85) wrote:

Good post but the high NFLX share price is kind of needing some reasons for correction...

May be below $100/share is a good entry point ...

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#5) On September 20, 2011 at 10:21 AM, RadioFreePG (< 20) wrote:

"I’m amazed at how quickly the market is willing to abandon a visionary, proven leader at the first signs of difficulty or unknown."

Let me just add about six amens here! It's the whole point of investing in NFLX in the first place and the basis of David's (and later Tom's) original recommendation. There are a lot of investors out there, just not too many Foolish ones!

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#6) On September 20, 2011 at 3:20 PM, spadeknight (49.61) wrote:

You totally forgot to mention a little competitor called redbox that offers bluray movies for a buck and a half. If youthink nflx can keep up fine but if they think they can just raise prices anytime they want and get away with it they have another thing coming. maybe im wrong and maybe im not. but nflx better wise up and be careful or they will find their stock price at 20 dollars a share. dont think that cant happen because it can just ask blockbuster.

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#7) On September 20, 2011 at 6:08 PM, moooooser (< 20) wrote:

Just my speculation, but I think Netflix is going to sell Qwikster ASAP. Why else would they separate out billing, recommendation engines, websites, and create a new brand? They could use that money to fuel international expansion, and more importantly, to write some really really big checks to content providers (or create their own). No one, including Netflix, Hulu, Amazon, or Apple, has managed to offer a large, diverse, current set of streaming content at a reasonable price. Selling off Qwikster could potentially allow Netflix to create that streaming catalog, and potentially regain some of the subscriber momentum they were previously enjoying.

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#8) On September 21, 2011 at 2:23 AM, awallejr (82.46) wrote:

And again it boils down to content. It seems they can't afford it on the streaming end. Their dvd content dwarfs their streaming content and it is the former that they want to dump, go figure. People are right, the streaming is what people want. It is what I wanted until I found out everything I wanted to stream I couldn't.

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