Is Netflix a Buy?

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Through a series of missteps and miscommunications, shares of Netflix (Nasdaq: NFLX  ) have fallen more than 70% from all-time highs set in July.

One school of thought would argue that the video guru clearly lost its way. In this view, shares are either fairly valued today or headed for even deeper pain.

I disagree. Netflix is a screaming buy today. And I'm putting my money where my mouth is: I expanded my own real-money holdings last week.

In my view, Netflix was a good buy at $200 per share. Since then, the company has put its back into digital video while seemingly giving up on DVD shipments. That's exactly the right strategy. Hence, Netflix is a great buy today.

Close that window, please!
CEO Reed Hastings opened a window of opportunity for rivals to pounce on the ill-conceived idea of forcibly splitting the company in half. Until streaming licenses cover a library as large and compelling as the DVD side, there's serious value in the integration. You get more information and quicker movie access in fewer clicks. Convenience is king.

But DISH Network (Nasdaq: DISH  ) decided that streaming services under the Blockbuster brand should be used to market DISH subscriptions rather than standing on their own. Coinstar (Nasdaq: CSTR  ) still doesn't have a download or streaming companion to go with its famed Redbox vending machines. (Nasdaq: AMZN  ) is buying content licenses but has failed to market the service effectively. Liberty Starz (Nasdaq: LSTZA  ) is trying to spread its relicensing strategy over a wider market with no direct portal plans of its own. And Time Warner (NYSE: TWX  ) property HBO could easily create a serious Netflix rival if only it were willing to loosen ties to the cable industry. No dice.

They could try again, but Hastings closed that window quicker than you can say "28 Days Later." All of these potential threats turned out to shoot blanks.

Finally, some investors worry about the overhang of license payments that are rolling onto the balance sheet over the next five years. This would be a legitimate worry if Netflix was just paying money and getting nothing in return. That's not how it works.

Those costs are realized when licensed content actually becomes available for Netflix customers. The cost is balanced by new assets and are equivalent to the costs of buying new DVDs. If you build it, they will come, as Kevin Costner might say. A stronger content library means more customers, ergo more revenue, and that seemingly crushing cost should pay off nicely as the years roll by.

When all is said and done ...
The current price makes sense only if you assume several worst-case scenarios playing out. Chances are that Netflix will deliver on at least some of its promises, which should be enough to double the share price in 2012. If Hastings is on fire with a combination of fantastic international growth, all the right marketing moves, and a compelling haul of new streaming licenses, the stock could do even better than that.

I'm not catching a falling knife. Netflix is a screaming buy.

Digital video will help networking stocks, too. The Fool's top analysts sat down to compile a report on the best stock for 2011 and came up with an infrastructure play you've probably never heard of. Yet this company rides the rising video traffic just as directly as Netflix itself. The report is totally free and has been updated to keep up with the changing times. Get your copy right now -- it's free for Fools.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On November 13, 2011, at 12:35 AM, beachdudeca wrote:

    Anyone that buys into Netflix thinkings that it should be priced at the $200- range deserves what he or she gets. The key issue here is that customer expectation is unrealistic given that the studios are not yet ready to discount their big budget movie content. If anything that means that streaming movie content will become more cost prohibitive and Netflix will become even more dependent on TV content.

    Best case scenario we see Netflix survive several 2012 Quarters in the red, Worst case we see Netflix need to file and restructure either in Q4 2012 or early 2013.

    What you have failed to grasp is that Amazon and Dish are just imitating the old Netflix model of offering streaming content as a way to attract and retain customers that do business with their highly profitable divisions, for Netflix this used to be their disk rentals that have a 50% margin.

    Amazon and Dish know that they can only offer limited streaming content without going in the red. Netflix though is going a different route as their guidance confirmed which will have them in negative cash flow most of 2012.

    If Netflix can pull this off then the price point of around $50- would make a lot more sense,if not then a lot of people are looking at a worthless investment.

  • Report this Comment On November 13, 2011, at 1:05 AM, nhalden wrote:

    Is Netflix a Buy?....

    Right now I think Netflix is a Gamble!

    NF is not going to reach $150 or $200 probably ever again. Buying NF now might make you a few bucks if it goes up to 90 or 95.

    The problem with NF is that it is a one trick pony. YES it is the best at what it is doing right now, but NF seems like an old dog right now. (I know 2 puns in a row) I think what we see is what we get right from NF right now. All the other competition is growing an gaining on NF in content and deliverable.

    NF must change it's business model to what I will call real time streaming. That is streaming of Movies and TV shows shortly after DVD release and episode air date. They Must compete with On-Demand and HULU+. These guys are making the same deals for less money, same content, and it's available earlier.

    As of right now NF is a day late and a dollar short.

    If I were a betting man NF has a little spike to correct for the backlash of the past few months, but the following quarters will show declining subscriptions again. (masked by international numbers of course) When this debacle started I thought NF was an $85-$90 I think it drops after the next quarter to $55-$60. WHY? because they will not have made any competitive changes, and the gap will be closing. NF is everywhere so are the other providers now. NF has content so do the other providers (and it's getting better) It's just a matter of time before it's just about interface. If NF doesn't change IT will be the dinosaur and go exstinct.

  • Report this Comment On November 13, 2011, at 3:13 PM, artheen wrote:

    The present multples P/E 20, P/Cash Flow 5.3 & Sales - 5 Yr Growth Rate (%) of 22 seem too large to justify the present price for a Company whose net profit margin is 0.08 and under pressure.

  • Report this Comment On November 13, 2011, at 3:33 PM, chopchop0 wrote:

    Nflx has no moat in digital content delivery. Amzn aapl or goog could outspend them in a heartbeat as content owners have wisened

  • Report this Comment On November 13, 2011, at 3:56 PM, tom2727 wrote:

    "the company has put its back into digital video while seemingly giving up on DVD shipments. That's exactly the right strategy. Hence, Netflix is a great buy today."

    That is a horrible strategy. HORRIBLE!.

    The DVD-by-mail business is the only thing that makes Netflix special. They should milk it for all it's worth. The fact that they even tried that quickster business tells me that Netflix management has no clue what they are doing.

    There's a half dozen deep pocketed competitors in streaming delivery. It's a commodity business and always will be.

    What Netflix should be doing is using the cash flow from their DVD biz to BUY content instead of renting it. Offer free streaming of what they own and charge by the view for stuff they don't (splitting the profits with the content owners). Combine this with the DVD delivery service at no extra charge. As their streaming library grows, they can slowly jack up prices for the combined service.

    With their current model, they will never make any real profits, because the content owners have them by the short curlies and they know it. As soon as the content owners see them cashing in, they will bump up the prices for their stuff. If Netflix doesn't want to pay, their competitors will. So they either overpay for content or have a sub-par library and lose subscribers. A no-win situation for Netflix.

  • Report this Comment On November 13, 2011, at 4:20 PM, beachdudeca wrote:

    @ tom2727

    and that in part is what an analyst should find shocking , that the amount Netflix is paying to rent content each year is about the same amount the largest content producer Time Warner spends to create new content it owns.

    Netflix went from a high profit disk rental model and is now an all you can eat bargain buffet with potentially razor thin margins.

    Unlike the rest of the industry that is based on delivering content for a profit , Netflix is going the route of streaming market share over earnings.

  • Report this Comment On November 13, 2011, at 6:59 PM, criticaluser wrote:

    The problem with NF is their content. Without a broad selection of top shelf movies, it will never go anywhere but lower. Streaming is the future, but content will determine the winner and NF is not in the game.

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