What's Behind Netflix's Action-Packed Year?

The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an exciting ending. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get lapped? First-half performances can hold some clues, so let's look to the recent past to find out whether Netflix (Nasdaq: NFLX  ) deserves a place in your portfolio going forward.

First-half recap
Netflix has been one of 2012's most volatile stocks. It began the year on an absolute tear, but its momentum flagged as the weather got warmer, as you can see here:

NFLX Total Return Price Chart

NFLX Total Return Price data by YCharts.

Here are a few financial snapshots of its recent performance:

Market Cap                                                                              $4.7 billion
TTM Revenue $3.36 billion
TTM Net Income $161 million
TTM Free Cash Flow $97 million
MRQ Revenue $870 million
MRQ Net Income ($5 million)
MRQ Free Cash Flow $14 million
MRQ Revenue/Net Income Year-Over-Year Change 21%/(108.3%)
P/E and Forward P/E 28.1/32.4
Price to Free Cash Flow 34.6
Motley Fool CAPS Rating (out of 5) ** (find out more by clicking here)

Source: Morningstar. TTM = trailing-12-month. MRQ = most recent quarterly.

What the numbers don't tell you
Anyone who's watched Netflix's rise and fall over the past two years is well-acquainted with its propensity for huge moves. January was certainly full of them, as the stock surged 75% on big streaming numbers, reports of overseas expansion, and a huge fourth-quarter earnings beat.

It was almost all downhill from there. That sterling fourth-quarter report was later revised lower on one-time charges. A number of partnerships, both tangible and potential, failed to rouse further investor optimism. The company's plans to become a premium cable feature have yet to reach fruition. A key role in Apple's (Nasdaq: AAPL  ) set-top TV box didn't cause fireworks -- investors are saving their excitement for the mythical Apple TV. Netflix also integrated its ad platform with Facebook (Nasdaq: FB  ) , which might be getting more negatively slanted scrutiny after the social network's bungled IPO.

Netflix also pushed past its deal to distribute Liberty Media's Starz, which expired in February. Instead of spending big to retain distribution rights, Netflix decided to compete with Time Warner's HBO. Several original Netflix series are now in or are nearing production -- four should be released by next year.

This year, it became blindingly obvious that CEO Reed Hastings made the right move in shifting focus to streaming. An IHS analysis of American viewing habits, reported in March by the Fool's Anders Bylund, noted that digitally delivered movies now capture more attention than physical media. Netflix's own financial results perfectly reflected that trend. Nearly four million fewer DVD subscribers were on Netflix's rolls by the time the company's disastrous first-quarter results sparked a major sell-off.

Where does that leave us today? Netflix's competitors are pushing hard to take advantage of the company's period of transition. Coinstar (Nasdaq: CSTR  ) keeps showing that there's life in DVD rentals. The Redbox parent bought out its only notable kiosk competition early this year. At this rate, those red envelopes might wind up in Redbox's stable. Amazon.com (Nasdaq: AMZN  ) has amassed more than 18,000 streaming titles for its Prime subscribers, and is also establishing Prime on game consoles (once Netflix's exclusive territory).

Netflix's progress toward digital distribution (and its slow shedding of DVDS) will be the big story of the second half. The company streamed a billion hours to subscribers in June. To fulfill its digital potential, Netflix will have to contend not only with competition, but with the ominous possibility of metered broadband Internet access. Such a service scheme would charge users for their bandwidth, mimicking the billing structure of most other utility bills.

Netflix's future is murky, but there are plenty of stocks with bright prospects. The Motley Fool's found one that we're so sure of that we're calling it our "Top Stock For 2012." To find out what makes this fast-growing company the right choice for your portfolio today, claim your free report on this top stock now. Or to get the story on the biggest name in tech, Apple, just click here to check out the Fool's premium research report on the iEverything maker.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Facebook, Netflix, and Amazon.com. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Coinstar, Netflix, Apple, and Amazon.com. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not 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.


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