Why Netflix Is Still Soaring (NFLX)

Why Netflix Is Still Soaring

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Shares of Netflix (NASDAQ: NFLX ) have nearly doubled this year while its chief competitor in video streaming, Amazon.com (NASDAQ: AMZN ) , has lagged the market. Now The Wrap reports that Anthony Bay is out as the head of Amazon Instant Video just weeks after Jim Buckle left as head of the unit's European operations, LoveFILM.

Interestingly, the shake-up comes in the wake of Amazon paying up to get exclusive access to episodes of "Downton Abbey" and the FX action hit "Justified." Do the changes reflect trouble at Amazon Instant Video? Are investors right to believe that Netflix is thriving despite intense competition?

The Motley Fool's Alison Southwick asks Tim Beyers of Motley Fool Rule Breakers and Motley Fool Supernova for his perspective in the video below. Please watch, and then leave a comment to let us know what you think.

And if you're interested in tuning in to a closer view at the streaming market and Netflix's role in it, I invite you to try our brand-new premium research report. 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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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of, and had a long-term call options position in, Netflix at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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

Comments from our Foolish Readers

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Report this Comment On February 27, 2013, at 2:13 AM, TheGrowingValue wrote:

The analysis was so shallow. Netflix used data to determine what content to create, but they did not even calculate the return on investment at all. Isn’t that more important to investors? The disastrous results are both House of Cards and Arrested Development cost a lot to produce but did not create impact to increase subscriptions at all. Netflix finally realized that and cancelled the Arrested Development, but they still on the hook for House of Cards.
Another big error in the video is that Amazon does create its own contents, but Amazon is more careful than the careless Netflix. Amazon is only producing a few episodes of about twelve different programs first and then they will analyze the data to determine what to continue to spend money on based on data. Amazon approach is a much more matured use of money and data.
How can anyone analyze an investment without even considering the valuation? It is so absurd that so many articles, videos, etc. all bought into the PR of the company and tried to be the cheerleaders of Netflix without even looking at the valuations. Netflix PE is 600. Netflix will not be able to grow fast enough to ever justify the lofty valuation for years to come. In fact, Netflix earnings declined 77% year-over-year. And with such careless use of money with no result on investment, it will only get worse, not better. I guess once PE is high enough, it does not matter anymore. LOL. What is the difference between PE 600 or 6000? If Netflix is losing money I guess it is even easier to ignore PE. Feel like dot com bubble era all over again. This can only end ugly.
Report this Comment On February 27, 2013, at 10:01 AM, TMFMileHigh wrote:

@TheGrowingValue,
Thanks for writing.
Let's address each area:
>>Netflix used data to determine what content to create, but they did not even calculate the return on investment at all.
Of course they did. This is why you're seeing Starz pay as much for Sony content that Netflix paid for Disney rights. It's also why you saw Netflix refuse to cave to Starz's extortionist prices. You can do that when you have data that tells you what content is worth.
>>The disastrous results are both House of Cards and Arrested Development cost a lot to produce but did not create impact to increase subscriptions at all.
We don't have hard data on this. Even so, your supposition isn't supported by the context. A Cowen survey found that "House of Cards" was likely as popular or more so than the HBO hit "Girls": http://www.cnbc.com/id/100471386
>>Another big error in the video is that Amazon does create its own contents, but Amazon is more careful than the careless Netflix.
We also don't have data on this. Meanwhile, we *do* know that Netflix has dropped some content (e.g., Starz) in order to make higher-yielding bets elsewhere, and with good results. The Disney deal is a great example of that.
>>How can anyone analyze an investment without even considering the valuation?
Great question, and I would never, ever advocate such an approach. My problem is the harping on Netflix's 600 P/E when that multiple gives zero credit for growth capital invested back into the business.
There are four questions that matter here:
1. What does the world spend on televised entertainment annually?
2. How much of that goes to streaming now?
3. How much could go to streaming services in the future?
4. How much of that opportunity has Netflix captured?
We know ads accounting for more than $200 billion in spending. We also know there are 900 million pay TV subscribers around the world, and that, in its core market, Netflix dominates streaming viewership a wide margin.
My point? Presuming that Netflix is anywhere near harnessing its worldwide opportunity is folly, at best, given the facts we have.
Data is absolutely essential to any strong investment thesis, and as an investor with real money at stake, I find each of these points far more telling than a misleading multiple.
FWIW and Foolish best,
Tim
--
TMFMileHigh in CAPS and on the boards
@milehighfool on Twitter
http://timbeyers.me