How Long Can Netflix Keep Rising?

Shares of Netflix (NASDAQ: NFLX  ) sure look expensive nowadays, don't they? I mean, seriously, who would want to buy a stock that trades at more than 650 times trailing earnings?

Apparently, plenty of people.

Netflix's new deal
In fact, Netflix bulls were out in force Wednesday, as the stock traded up nearly 6% after the company announced deeper integration with social-networking giant Facebook  (NASDAQ: FB  ) . In the very near future, then, U.S.-based Netflix users will be able to automatically share what they're viewing with their Facebook friends -- a feature that, as fellow Fool Rick Munarriz pointed out, has already been incorporated in each of the other 44 countries in which Netflix operates.

So what's the big deal? To be sure, the U.S. market represents nearly 82% of Netflix's more than 33 million subscribers, so the added global visibility it can garner from allowing the bulk of its customers to automatically share their viewing habits among Facebook's 1 billion-plus active users could be substantial.

For Facebook users' sake, however, I should hope Netflix can find a way to at least give its users some semblance of control over exactly what's posted to encourage the use of the new integration (short of allowing us to simply not use it, that is). For instance, some gentlemen might not be quite ready to admit they really enjoy their marathon viewing sessions of My Best Friend's Wedding. Or, as is the case in my household, my Facebook friends probably might not appreciate that 99% of our Netflix viewing consists of LeapFrog, Dora, Curious George, and various Disney  (NYSE: DIS  ) movies.

Streaming heats up
That said, Wednesday's Facebook news still doesn't change the fact that Netflix's well-funded competitors continue going to increasing lengths to bare their teeth.

Just last week, for example, Redbox parent Coinstar (NASDAQ: OUTR  ) raised eyebrows by selling $350 million in bonds. Of course, the company was light on details, saying only that it intends to use the money for "general corporate purposes, which may include but is not limited to maintenance or repayment of outstanding debt, acquisitions or other investments, and payment of other corporate expenses." That still didn't stop many investors from at least hoping some of that cash will be allocated to content purchases for its new Redbox Instant streaming service -- the beta version of which, incidentally, launched on Thursday by offering one month free trials to new members.

Even more worrisome for Netflix, Amazon.com (NASDAQ: AMZN  ) CEO Jeff Bezos has said that his company is currently spending more than $1 billion per year on content for its Prime streaming service. Of course, Bezos has had no qualms making his long-term plans of broader Web domination crystal clear from the very beginning, so patient Amazon shareholders have been more than willing to put up with temporary losses and sky-high valuations as they wait for the real payoff down the road. What's more, Amazon Prime not only undercut's Netflix's prices at less than $7 per month, but it also provides free two-day shipping on millions of items on the site and allows members to borrow one electronic book each month from its Kindle Owners' Library.

Can't we all just get along?
Luckily for Netflix, CEO Reed Hastings recognizes the threat, saying last year that "Amazon is the best competitor we've ever faced." Of course, that probably wasn't much solace for Netflix investors two weeks ago, after Amazon announced that it had won the exclusive right to stream current and future seasons of the popular television show Downton Abbey beginning June 18.

For many, then, Amazon's attractive value proposition seems simply unbeatable. And, in all honesty, I'll probably end up subscribing to Amazon Prime once its Downton Abbey deal kicks in. Heck, my family has likely already purchased enough individual episodes of various shows from Amazon.com to justify paying for a full subscription, anyway.

Meanwhile, considering how often we also use Redbox kiosks to pick up the latest and greatest movies on Blu-ray, Redbox Instant could also prove a compelling value at $8 per month, especially since it includes four monthly rentals from its DVD kiosk locations.

But don't think for a second that we'll be ditching our Netflix subscription anytime in the near future; even if we were to subscribe to all three of the aforementioned services, it would still cost less than half of what we used to shell out for our old cable subscription. For now, though, Netflix has more than enough content to keep even the most determined couch potato happy for years. However, I'm especially looking forward to the fruits of Netflix's recent Disney deal, with new titles from the House of Mouse to be available on the service beginning in 2016, including standard Disney animation films as well as titles from Pixar, Marvel, and (swoon) yet-to-be-created content from its newest subsidiary, Lucasfilm.

Six back, relax, and stay awhile
While Netflix may look ridiculously expensive on the surface, I think it may yet be able to grow into its valuation over the long haul, so I see no reason to close my long-standing "Outperform" CAPScall on the stock. In the end, despite trading near 52-week-highs amid fierce competition, I'm convinced that Netflix's best days lie ahead.

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 16, 2013, at 2:44 PM, markfothebeast wrote:

    I am happy for Netflix. They bombed a couple years ago when deciding to change price options and split services. I hadn't lost faith in them and still continued the streaming video service. Integrating streaming Netflix into boxes like the Roku, Sony Bravia TV, etc. has really made it a common thing in a household.

  • Report this Comment On March 16, 2013, at 3:33 PM, 742ks wrote:

    As long as cable ad satellite companies charge what they charge more people, though slowly, will transition to streaming. I invested in a Roku & NetFlix and could not be happier. I still watch the same TV show a few days later. Doesn't bother me that I get to watch Elementary 4-5 days later on CBS's website. My biggest complaint? Sports.Now I have to go to a sports bar to watch basketball games. Not too bad but some night I would love to just be on the couch watching the game.

  • Report this Comment On March 16, 2013, at 3:33 PM, 742ks wrote:

    Sorry typo....As long as cable AND satellite companies

  • Report this Comment On March 17, 2013, at 3:01 AM, booyog wrote:

    i enjoy NETFLIX. I think it is an inexpensive entertainment. some tv shows have been changed for computer watching but all and all i will be loyal to the end, which i hope is far down the road

  • Report this Comment On March 17, 2013, at 9:01 AM, XxTAMMYGIRLxX wrote:

    At my house we enjoy Netflix and Hulu Plus on our Roku. It's all the tv we need and at a cheap price.

  • Report this Comment On March 17, 2013, at 3:45 PM, wjcoffman wrote:

    How much revenue does AMZN derive from NFLX use of Amazon Web Services (AWS)? I don't see that metric in articles about AMZN vs NFLX. That little nugget, that NFLX is dependent upon AMZN, doesn't appear unless/until there's some problem with AMZNs servers - as happened around CHRISTmas 2012.

    If AMZN truly wants to own the streaming business wouldn't they refuse NFLX's business?

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