3 Reasons to Believe in Netflix Next Week

It's going to be a busy week of earnings reports next week, but Netflix (Nasdaq: NFLX  ) should still attract plenty of attention.

Analysts aren't holding out for much. They see the leading video service cranking out a profit of $0.05 a share, well short of the record $1.26 a share that it posted a year earlier. However, there are a few reasons to get excited ahead of its quarterly report on Tuesday.

Let's go over the major reasons to get excited.

1. Streaming is booming at Netflix.
Forget about the poorly communicated rate increase last summer and the short-lived Qwikster fiasco. Anyone who despised Netflix for what transpired has moved on, and Netflix is signing up far more streaming subscribers than those calling it quits.

Anyone wanting proof -- beyond a strong first quarter in terms of streaming subscriber additions -- got it earlier this month, when CEO Reed Hastings revealed that his company served up more than a billion hours of streaming video last month.

Contrary to popular belief, Netflix is already making a lot of money on its stateside streaming business. It's the company's international endeavors that are gnawing away at its profitability, especially in the U.K., where it's bumping up against more established rivals, BSkyB and Amazon.com's (Nasdaq: AMZN  ) LOVEFiLM.

Yes, Netflix is shedding DVD accounts, and slaughtering that cash cow isn't pretty. However, as a streaming business, Netflix has never been bigger than it is right now.

2. The competition is not getting any closer.
Remember when Amazon rolled out a streaming service for Amazon Prime shoppers at no additional cost? Remember Coinstar's (Nasdaq: CSTR  ) Redbox promising a digital strategy a year ago, or the streaming service that it's expected to roll out later this year with Verizon (NYSE: VZ  ) as a partner?

No one has come even close to Netflix's breadth of streaming content, laundry list of playback devices, and roughly 26.5 million streaming customers. If anything, the gap appears to be widening with every passing quarter.

Cynics will argue that the model isn't as lucrative as bulls believe that it will be, but Netflix's moat is apparently pretty impenetrable.

3. The market should start valuing Netflix on its stateside business and international potential.
Few will argue that Netflix is cheap, but that's exactly what Citigroup analyst Mark Mahaney did earlier this month, arguing that Netflix is cheap because it trades for just 12 times the earnings of its domestic business.

Should investors be penalizing Netflix for deficits as it expands into new regions? If Netflix decided to shutter all of its unprofitable international outposts, would the stock rally to reflect its low profit multiple? It wouldn't. Global expansion is a big part of the company's scalable model, and the sum of Netflix's parts is currently being undervalued by investors.

If Netflix is able to communicate Mahaney's message -- and it already does this by breaking out its international and domestic operations in its quarterly reports -- valuation skeptics will realize what they're missing.

Netflix isn't broken -- and it may be cheap. A strong report on Tuesday would be a great way to get that point across. 

Stream on
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The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix. 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.

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.


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  • Report this Comment On July 25, 2012, at 1:42 PM, OceanJackson wrote:

    Well the report wasn't strong, and the stock got battered. Yet I agree with most of this thesis. For those who listened carefully to the Q2 Q&A Session with Reed Hastings, he said regarding his thoughts of competing with Amazon & Hulu-Plus in the streaming battle, "our lead is only widening," citing the SandVine broadband report on total streaming. Netflix is in Growth Mode - their profits are being used to expand Internationally, widening their mote, and to aqcuire new Content. And they still turned in a profitable quarter! Reed was excited at the progress in the International Markets towards profitability...and once they turn, whoa baby! That's when NFLX will soar. They aren't done, they're just beginning.

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