3 Reasons Why Netflix Will Close Higher This Week

In a rare piece of good news this month, Netflix (Nasdaq: NFLX  ) is inking a new streaming deal with DreamWorks Animation (Nasdaq: DWA  ) .

"Moving forward step by step, despite the foot with the bullet hole..." CEO Reed Hastings wrote on Facebook last night, linking to a New York Times article on the deal.

The popular family-friendly fare won't pop up on the streaming service anytime soon. The new deal doesn't kick in until 2013, and many of the computer animation studio's blockbusters won't be available right away. However, it's just one encouraging sign for a company that has seen its share price shrink 58% since peaking just shy of $305 two months ago.

I have been hard on Netflix in that time, and rightfully so. However, now that even Hastings is aware of the bullet hole, maybe a tourniquet is in order to stop the bleeding.

Let's go over a few of the reasons why I believe that Netflix is due for a bounce this week.

1. New streaming deals are coming
Netflix's world began to unravel three weeks ago, when Liberty Starz (Nasdaq: LSTZA  ) revealed that it would not be renewing its streaming deal with the video rental giant.

This was a pretty big blow. Unlike the low profile of Starz as a premium movie channel, the company actually holds the streaming rights for a couple of very important studios. Netflix will have a void to fill when this multi-year deal expires in February. Thankfully, Netflix is on the case.

It announced a renewed and expanded deal with Discovery Communications (Nasdaq: DISCA  ) last Wednesday. Is there a lot of demand for greater breadth on streaming content from Discovery, TLC, and Animal Planet? Well, this is an arms race, and every piece of incremental content helps.

The new DreamWorks Animation deal won't come cheap. Analysts estimate that it may cost $30 million per film. That's a lot of dough for a future library, but it's easy to see why DreamWorks Animation is excited about it. This is the kind of hassle-free revenue that will help offset any box office or retail shortcomings.

Strategically speaking, it was a good thing that Netflix refused to give Starz a blank check. There's no way that Starz will ever be able to make that kind of money elsewhere, and now rival studios know that Netflix will pay -- but not overpay -- for quality content.

2. The competition isn't as ready as you think
Investors were hanging on DISH Network's (Nasdaq: DISH  ) "stream come true" event on Friday, figuring that Netflix was bumping up against another meaty rival.

It was pitiful. Instead of a full-blown streaming service, DISH Network is simply offering the Blockbuster Movie Pass service of mail- and store-based DVD and video game exchanges for $10 a month. It will also offer a limited digital catalog -- 3,000 titles deep at the moment -- that can be streamed through a limited number of TV setups. Slim pickings on the "stream come true" end and forcing users to pay hefty DISH monthly bills on top of the $10 price will be a deal-breaker for most couch potatoes.

Since Coinstar's (Nasdaq: CSTR  ) Redbox remains woefully silent on the digital front, we're back down to Amazon.com (Nasdaq: AMZN  ) as the only feasibly priced threat to Netflix's digital smorgasbord model.  Sadly for the leading online retailer, it also isn't where it needs to be to compete. Amazon's video library -- which at 11,000 largely dated titles isn't going to be the solution for customers bored by Netflix's tens of thousands of streaming options -- is weak, and it's still not an intuitive service to use across popular web-tethered devices. Sure, Amazon did sign another deal today with FOX which gives its service a hit TV show in 24, but most of the titles called out in the press release fail to inspire.

As we get closer to the end of the month -- and fence-straddling Netflix subscribers begin surveying the scene -- they'll realize that there isn't a pure replacement that isn't sorely lacking in one regard or the other.

3. Netflix is finally cheap
Netflix shaves its third-quarter subscriber target by 4%, analysts slash their profit targets by even less, and the stock loses more than half of its value since its summertime peak?

There's something wrong here, and it smells like an opportunity.

Netflix is now trading for 29 times this year's projected profitability and less than 20 times next year's target. I should also point out that even though Wall Street has talked down Netflix's prospects in recent weeks, bottom-line estimates are actually higher for 2011 and 2012 than they were three months ago.

There are plenty of smart investors, including many of my fellow Fools, that don't see it that way. They think that Netflix peaked at 24.6 million domestic subscribers three months ago, and give little value to the 43 new countries that Netflix entered earlier this month.

In my mind, there's a greater chance that the next wave of news will be good -- not bad. Open up the closet. Every shoe has fallen. There's a stronger likelihood that Netflix will announce that it will offer new releases as digital piecemeal rentals or announce a needle-moving content deal than it will (once again) rain on its shareholders.

I am fully aware that Netflix has done itself more harm than good since it hosed down its guidance. We may very well be looking at less than 24 million domestic subscribers by the end of the month. Alas, that's perhaps the last stiletto dangling dangerously from the top rack.

However, I don't have to rent Hall Pass to know that many participants among the millions of Netflix subscribers will come to realize how good they have it at home. They'll realize how easy it is for that overnight Redbox rental to linger around for a few extra buck-draining days. They'll see that there is no "Amazon" or "Blockbuster" button on their Blu-ray remotes. They'll realize that $10 on top of a stiff satellite television bill is no bargain at all. Qwikster jokes will dry up. I promise.

It's not as bad as you think for Netflix.

If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.

Motley Fool newsletter services have recommended buying shares of DreamWorks Animation, Netflix, and Amazon.com, as well as creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (20) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 9:55 AM, kariku wrote:

    You really trust a CEO who uses FB ?

  • Report this Comment On September 26, 2011, at 10:46 AM, LWILLS wrote:

    I agree Rick.

  • Report this Comment On September 26, 2011, at 10:50 AM, setht23 wrote:

    I'm really tempted to intiate a position at this price.

  • Report this Comment On September 26, 2011, at 11:01 AM, xnicholas wrote:

    3 Reasons Why Netflix Will Close Higher This Week

    1. people who lose money on nflx will pump the stock

    2. people who do not read financials will buy the stock thinking nflx is more "valuable" now that it has fallen 60%

    3. value isn't what stocks are about. if value is what stocks were about then the market would be much more controlled and efficient.

  • Report this Comment On September 26, 2011, at 11:21 AM, TMFBreakerRick wrote:

    kariku, would you trust a CEO that does NOT?

    xnicholas, I was critical of Netflix's moves back in July -- when it wasn't fashionable to do so. I don't mind turning positive now -- even when it's even more unfashionable.

    Which financials have you been reading to come to the conclusion that Netflix's "value" has dropped by more than its share price? And "value" may not be what the market is all about, but "perceived value" is.

  • Report this Comment On September 26, 2011, at 1:26 PM, jabroniman wrote:

    I'm pretty sure it's gonna take more than adding Dreamwork Animation (2013) and Discovery flicks to Netflix streaming to bring me back, yawn.

  • Report this Comment On September 26, 2011, at 2:19 PM, nick1200 wrote:

    Your right, Netflix is on it's way back up. Great service. Great value.

    I'd pay 7.99/mo for the documentary content alone.

    Best streaming service. Period. People who say they don't trust Reed Hastings sound like the same ones who didn't trust Steve Jobs in 1996*

    * Fortune, 2/19/1996: “Apple’s erratic performance has given it the reputation on Wall Street of a stock a long-term investor would probably avoid.”

  • Report this Comment On September 26, 2011, at 2:31 PM, griffjj wrote:

    As Fools, why do we care whether or not it closes higher this week? Good article. Bad title.

  • Report this Comment On September 26, 2011, at 6:11 PM, kariku wrote:

    @Rick Of course. No person over 31 should use FB (and I'm being generous)

  • Report this Comment On September 26, 2011, at 7:14 PM, racchole wrote:

    Keep things simple, that is the easiest way to make a smart decision. If you are under 30 years of age, buy Netflix for your portfolio. It's not going away anytime soon.

  • Report this Comment On September 26, 2011, at 7:29 PM, Jay456 wrote:

    I never understand how TMF sees no problem trying to tout it's disciplined, intelligent long-term attention to detail approach while allowing foolish nonsense headlines such as "3 Reasons Why Netflix Will Close Higher This Week" to show up on this website...posted by what seems to be an employee, no less. What gives?

    Annoying!

  • Report this Comment On September 26, 2011, at 11:53 PM, SwiperFox wrote:

    Tripled my position this week. Probably won't look at it again for a year or two.

  • Report this Comment On September 27, 2011, at 3:00 AM, kariku wrote:

    @Jay456 Totally agree with you. Valuation - ridiculous, momentum - zero, Amazon and others strengthening their streaming business, current PR - catastrophe. Why pump NFLX ??

  • Report this Comment On September 27, 2011, at 2:44 PM, nhalden wrote:

    Wrong....well maybe...

    Could it be up on folks taking position...sure the end of the down turn has to be near right?

    I think that's a wrong position to take.

    NF has stated that it is their subscription base that creates the revenue that allows them to buy new content. On the Record Hastings has said that New content isn't the important piece for them. It's subscription #'s. NOW that content is actually going away 8% - and Subscribers are down at least 1,000,000. AND now that the bread winner of the NF family is going to be split into a different company...HOW CAN STREAMING SURVIVE...ok...grow and be maintained? It can't. Hastings has admitted as much. No cash no content.

    So to say that the Dreamworks deal is a BETTER DEAL THAN STARZ would be WRONG. Content to content...for a year STARZ (sony/disney...and others that we forget about) is far cheaper than the $30M deal per movie from Dreamworks.

    1. It would allow NF to keep thousands of titles that will go away at the end of the year.

    2. Grow by larger #'s over a given year.

    3. On an estimated per title (just films in a given year) STARZ content comes to $8M per title.

    The thing is the Dreamworks deal is an OPTION to buy...not a guarantee to buy. So Hastings is basically using the statement of the deal to entice trading (buys mostly) and really only may add 2-3 titles (if that) per year starting NEXT YEAR!!!

    Talkiing internationally...Canada has a fee for usage over certain # of mins thus making the actual cost of Streaming NF significantly more expensive than the subscription...which is why subscriptions are down. Brazil will be similar.

    ON TOP of all that you still have the whole FaceBook debacle. AND the removeal of user friendly social content from the NF site to begin with...and the drill down capability from their streaming devices....

    Take the better half of the company away and you should have roughly have the stock price....lol maybe...

    Well Half of the stock is gone....down nearly 70%

    I suspect that NF will be a less than $90/share company after the new year if they don't announce significant new content deals to replace STARZ

  • Report this Comment On September 27, 2011, at 5:55 PM, StockGuru504 wrote:

    I went to a movie this past weekend .. it cost me $37 for two. - $5 gas + $20 tickets + $12 for popcorn and drinks. If I go every weekend, it will cost me $148. for two people. With Netfllix, I can watch all the movies and documentaries I want for $8 per month or $16 if I want to get the latest movies not available via the internet. What the problem? Anyone who thinks they can get a better deal from Amazon or Disk Network has no idea what they are talking about. As to renting movies at $1 each from RedBox ... there's no comparison given the limited selection plus the time and gas to get there. In my opinion, the stock is being driven down by a combination of : (1) hedge funds who want to buy in at lower levels, (2) cable companies hoping to keep their "money-train" going as long as possible, adn (3) "weak hands" investors who can't think for themselves.

  • Report this Comment On September 28, 2011, at 3:23 PM, nhalden wrote:

    First of all where are you going to the movies?

    $5 in gas really? That's like nearly 2 gallons. Assuming you what are you doing a 40mile round trip? Regardless...

    Second...do you go to the movies every weekend? (I know some do right?)

    Netflix isn't trying to compete with Movie Theaters. People pay the premium to have the movie going experience. (big Screen, Sound, etc...)

    So the comparison is flawed as one has nothing to do with the other.

    Yes "Mr. Netflix PR Guy" you can watch as much as you want via streaming...However, MOST real people want to watch specific or a certain type of content; NEW releases for example...can't really do that on streaming. They also like next day episode watching...can't do that on NF (although they would imply that you can)

    The biggest think to remember NOW is that soon Netflix will ONLY BE STREAMING content...Qwikster will be the DVD side and a separate business.

    SO NF stock is going down rapidly ...because NF is weak based on what people want and are willing to pay for.

    I CAN subscribe to [choose magazine] because it has [whatever content] but If it's not practical, or current, or user friendly,,,,I find an alternative that better suits my needs. NF is betting (wrongfully) that subscribers will stay out of convienence not because they are using the service.

    NF can only blame itself.

  • Report this Comment On September 28, 2011, at 3:54 PM, nhalden wrote:

    NOTE...so far (5 days) NF is down overall. What exactly does "close higher" this week mean?

  • Report this Comment On September 29, 2011, at 2:24 AM, Rogo wrote:

    "Netflix shaves its third-quarter subscriber target by 4%, analysts slash their profit targets by even less, and the stock loses more than half of its value since its summertime peak?

    There's something wrong here."

    Yes, what's wrong here is your failure to recognize the valuation was ludicrous at north of 80x earnings. The valuation is now sane. And quite frankly, it's not clear how many people are going to cancel yet. It'll be months before everyone has gone through their credit card bills, mentally processed the rate increases, looked at their unopened red envelopes, seen something called "Qwikster" on their credit card statement, etc.

    The notion that the damage of a price increase and split like this is over is patently absurd.

    I'm not saying Netflix is a bad buy here. It might actually be a good time to get in since the long-term prospects are intriguing. But the notion this is a slam dunk of a company -- when it's clear the studios fully understand how to extract ever increasing rights fees and Netflix's ability to raise prices on streaming is clearly limited -- is also questionable.

  • Report this Comment On September 29, 2011, at 4:58 PM, nhalden wrote:

    Update....

    NF stock down again 14% (nearly 75% from 52 wk high)

    At what point does it close "up" and what counts as "up"?

    Better than it opened for he day...the week...

    It may hit 90 by the end of the week at this rate.

  • Report this Comment On September 29, 2011, at 6:18 PM, a1sauce wrote:

    At one time, Ntfx was the best provider for low-cost videos to the home, first by DVD mailing and now steaming. But, now that steaming is becoming ever-more available with the expansion of high bandwidth cable and WI-FI, I believe that Ntfx has already passed its peak.

    I think Ntfx will slowly drift towards less prominence and less profitability as many competitors join the field and become capable of providing at a low cost, direct video streaming to homes. Hulu, cable companies (Comcast), Amazon, Apple, Microsoft and others, particularly movie producers have seen the growth of Ntfx and want a piece of its action. Movie steaming will become as ubiquitous as TV stations of the past and no one company will be able to dominate the market again. There just won't be enough profit in it anymore.

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