3 Things That Will Move Netflix Higher

It doesn't seem as if Netflix (Nasdaq: NFLX  ) can do anything right these days. Shares of the video-service provider hit fresh two-year lows earlier this month, even though the former dot-com darling is growing its streaming subscriber count and distancing itself from last summer's comedy of errors.

I guess you can't please some cynics, especially when many are still as red-faced as the company's signature mailer.

However, now might be a good time to remind investors on both sides of this fence of the positive catalysts that may move the stock higher again. Let's go over some potential developments that would get Netflix moving again in the right direction.

1. More original content is coming
House of Cards, the political drama series directed by David Fincher and starring Kevin Spacey, was filming near Baltimore earlier this month. In other words, the rumored money issues that threatened to derail the big-budgeted series three months ago have been apparently cleared up.

This is going to be a big win for Netflix. February's debut of Lilyhammer was a worthy introduction to original programming, but House of Cards -- and next year's Arrested Development revival -- are the magnetic shows that will put Netflix in the same conversation as Time Warner's (NYSE: TWX  ) HBO.

For those scoring at home, a subscription to HBO costs nearly twice as much as a monthly Netflix streaming subscription -- and there's no need to shell out big bucks for a cable programming service. If the value proposition of Netflix at $7.99 a month doesn't make sense now, it will when CEO Reed Hastings starts showing up at Emmy podiums.

2. Piecemeal rentals will change everything
New releases are a big hole in Netflix's streaming offerings. Major studios don't want to offer their latest retail releases on digital smorgasbords while they're still making good money from DVD sales and pay-per-view rentals. In the meantime, Netflix and Coinstar's (Nasdaq: CSTR  ) Redbox continue to see studios holding back on even optical disc releases for four or eight weeks from the discounters.

This will probably never change, leaving Netflix to embrace the model that Amazon.com (Nasdaq: AMZN  ) has been crafting for more than a year. The leading online retailer has a limited library available as unlimited streams, but it backs that up with new releases available on a pay-per-stream basis.

Netflix should be all over this. Even if it's a strategy that hasn't exactly taken off for Amazon, the e-tailer doesn't have the 23 million streaming subscribers that Netflix has amassed over the years. Offering new releases for a few bucks per digital rental would help make Netflix a complete service while also raising the upside of what is possible through Netflix's average revenue per subscriber (which, for now, is capped at $7.99 a month on the digital side).

3. Streaming profitably -- internationally -- would be a game changer
Netflix has been sending the wrong message to investors. It has made it clear that it's willing to lose a lot of money as it expands overseas. A welcome shift back to profitable operations will simply find Netflix packing its passport and losing money in new international markets.

Fundamentally speaking, Netflix is trading near its lowest levels in more than two years because its model is a lose-lose scenario. The emphasis on digital is forcing average revenue per user to shrink toward $7.99 a month as it sheds disc-based accounts. The complications of licensing foreign content for international expansion is too prohibitive to achieve profitability in the near term.

The $7.99 ceiling is addressed by the inevitable addition of piecemeal premium rentals highlighted earlier. The second hurdle is something that Netflix will have to do on its own. Even if it means scaling back on content and outsourcing fulfillment, Netflix needs to prove to the investing community that expanding overseas is worth it.

Nobody said the road to redemption would be easy, but the best positive catalysts often require imagination and a lot of sweat.

Stream on
Motley Fool co-founder David Gardner has been a fan of Netflix as a disruptor for nearly a decade, but there's a new Rule-Breaking mutlibagger that's getting him excited these days. Learn more in a free report that you can check out right now.

The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix, Coinstar, and Amazon.com. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He owns noshares in any of the other stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On June 13, 2012, at 11:19 PM, tom2727 wrote:

    On #2 - Have they actually announced "piecemeal rentals"? Because this has been a "no brainer" since 2008. It's 2012 now. What makes you think Netflix management has suddenly removed their heads from their backsides?

    The link below is a year old, but I see nothing to indicate they've changed their minds:

    http://consumerist.com/2011/04/netflix-ceo-pay-per-view-not-...

    Amazon actually has a clue. Which is why they've had "pay per view" streaming from day 1. They'll eat Netflix's lunch if they don't watch out.

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