The BULL case for 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.