How Far Will Netflix Fall This Week?

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If any stock is justified in taking a breather this week, it would have to be Netflix (NASDAQ: NFLX  ) .

Shares of the leading video service soared 71% last week -- more than any other stock -- after posting blowout quarterly results. Surprising analysts with an unexpected profit is pretty darn awesome, but debunking myths of waning popularity by adding 3.85 million net new streaming subscribers is even better.

However, was model affirmation worth the $3.9 billion bump in market cap that Netflix experienced on the week? Bulls will argue yes, but every rally has its limitations.

Naysayers aren't home
Last week's push wasn't a short squeeze.

There were just 10.1 million shares sold short as of mid-January, well below October's peak of 17.2 million bearish wagers. The short covering has been happening for months, and many of those skeptics were spared last week's surge. You actually have to go all the way back to March of last year to find the last time that Netflix's short interest was this low heading into last week's quarterly report.

When you consider that share volume clocked in at nearly 58 million shares during last week's four trading days, there's more to last week's rally than merely bears heading for the exits.

A lot of the buying came from investors who had their faith restored in the model and the company. No one is even close to Netflix in its niche, and the gap will grow that much wider now that Netflix has more than 33 million global streaming subscribers. No one can justify the investment in content acquisition that can be divided by as many premium customers as Netflix has lined up.

A knock on Netflix is that it doesn't own its content, but the same can be said of most satellite and cable television providers.

Blinking amber
Despite the big push last week, Netflix shares still opened 2% higher at $172.57 this morning, setting a fresh 52-week high mere minutes later at $177.25. However, the shares weakened a few hours into the trading day.

If there's an encouraging sign it's that many of the headlines on Netflix through financial outlets today are bearish. We're seeing the accounting issues of how Netflix scores its digital content deals regurgitated, and many are hopping on the lofty earnings multiples that the stock is now commanding. Contrarians will eat all of that up as a bullish indicator.

Bulls need to be realistic here, though. Netflix isn't going to revisit its 2011 highs north of $300 just because it's generating record revenue with its record number of subscribers.

It's a different company now. Investors bid up Netflix because they falsely assumed that splitting DVD and streaming into two separate categories would ultimately boost average revenue per user. It didn't. It's tethered to the $7.99 monthly price, and even during last week's call it stood by its intention to not raise prices.

It's probably the right strategy. (NASDAQ: AMZN  ) is cheaper, and it includes free two-day shipping of Amazon-stocked merchandise and monthly Kindle book rentals. Coinstar's (NASDAQ: OUTR  ) Redbox Instant is matching Netflix on price, yet it also include four nights of DVD rentals from its fleet of kiosks.

Streaming a happy medium
Netflix has always been a volatile stock, and you can expect the next few weeks to be just as frenetic. The market's not sure if Netflix is the ultimate disruptor or a rebirthed dot-com darling that's about to get disrupted itself. The gyrations will make Netflix popular with traders, and longtime investors -- including myself as a satisfied Netflix investor since 2002 -- should already be used to the ups and downs.

CEO Reed Hastings has a clear vision of what he sees for Netflix. He hasn't bowed to studio pressure to offer tiered pricing so they could offer fresher content without devaluing new releases. Nor has he bowed to rivals offering everything from pay-per-view rentals of new releases to video games.

He sticks to the simple $7.99 monthly plan, even though Time Warner's (NYSE: TWX  ) HBO -- which Hastings often refers to as his service's biggest competitor -- charges roughly twice as much for less content.

It's hard to fault his vision when the stock is climbing, just as it was easy to come down on Hastings when the stock crashed during the latter half of 2011. At the end of the day, he knows what he's doing. Longtime investors are reasonably sure of what they're doing. Speculators, on the other hand, are too involved with the wild swings to seriously weigh the company's fundamentals.

Netflix may not have deserved all of last week's nearly $4 billion pop, but there's only so much it can give back this week when nearly everything that bears believed has been proven wrong. 

Stream on
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

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