Netflix, $300, and Is It Really Different This Time?

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It was just over two years ago that shares of Netflix (NASDAQ: NFLX  ) were first at the $300 price level. What followed is the stuff of economics classroom legend: A series of missteps including a big price increase, and an overly aggressive push by CEO Reed Hastings to move beyond DVDs and divide the company into separate groups via Qwikster, led to a massive customer revolt and a net loss in subscribers from one quarter to the next. By the end of the year, shares were down more than 75%, and investor faith in Hastings and the company's ability to grow were near all-time lows. 

Here we are, back at $300, and investor confidence is as high as it's ever been. Is the sky the limit, or is Netflix primed to go Icarus and send investors crashing and burning all over again?

The More Things Change
The dynamic shift of consumers choosing not to subscribe to cable programming is growing. Time Warner Cable's  (UNKNOWN: TWC.DL  ) residential video revenue is down 3% in the first half of the year, even as high-speed data sales grew by nearly 15%. And since residential video makes up half of the company's revenue, even robust growth in high-speed data and business services won't stem the losses. In all, Time Warner Cable has reported a net loss of 191,000 customers through the first half of the year. 

Verizon  (NYSE: VZ  ) has managed to continue to eke out growth in its "Wireline" business, but mostly at the expense of competitors as it expands its FiOS fiber-optic network.  Verizon grew its FiOS customer base by 12% for both video and Internet in the first half of the year, further challenging Time Warner Cable's ability to retain video customers in markets where they compete.

However, Verizon isn't stopping there, with its still-in-beta Redbox Instant partnership with Redbox owner Outerwall for $8 per month unlimited streaming, plus DVD and Blu Ray rentals at the familiar kiosks. However, the service is still in "beta" according to the website, and while anecdotal, I've yet to have a conversation with anyone that uses the service. But the acquisition of the remaining stake in Verizon Wireless from partner Vodafone will be the company's primary focus moving forward. The $49 billion in bonds that the company will now have to service will take precedence over any efforts to grow an $8 per month streaming offering. 

Liberty Global's (NASDAQ: LBTYA  ) (NASDAQ: LBTYB  ) Virgin Media subsidiary is making a move that could be the first of many, with its just-announced plans to integrate Netflix into its British cable TV offering. From the press release:

Dana Strong, Virgin Media's chief operating officer, said: "We're delighted to be bringing yet another groundbreaking service onto TV screens in millions of Virgin Media homes. Netflix is a fabulous addition to Virgin Media TiVo, enabling our customers to enjoy even more of their favourite shows and movies simply and easily – all through their TV set-top box and at outstanding value.

This is a significant step forward for Netflix and competing streaming services. The question is, will this be a one off, or does this signify a sea change for the cable TV industry? Only time will tell.

The More They Stay the Same
Amazon  (NASDAQ: AMZN  ) is investing in original content as well as exclusive deals for content like The Dome to attract customers. Prime, however, is about much more than just streaming content, with free 2-day shipping and the Kindle lending library included for $79 per year. Amazon uses Prime as a "gateway drug." Once you've started "using," it's pretty hard to stop. Amazon doesn't make the numbers public, but it has been reported that Prime members spend 150% more than non-Prime members. And at the end of the day, that's the "Prime" directive at Amazon: make it easy and more affordable for consumers to buy as much stuff from the company as possible. Free streaming is one of the draws; it will never be the core deliverable. 

Time Warner's HBO Go, Disney's WatchESPN, and other popular streaming offerings remain tethered to pay-TV subscriptions, at least in the U.S. And until these streaming counterparts to their cable channels go a la carte for non-cable subscribers, this will keep cable subscriptions losses at a steady drip, versus a deluge. 

Final Thoughts
Netflix seems to have truly gone through a perfect storm back in 2011 as the company shifted away from domestic DVD delivery being the core business and focused its energies on domestic and international streaming. While this has been an expensive undertaking, the results are undeniable: At the end of Q2 2013, there were 37.56 million subscribers to streaming -- a 47% increase from 2011's 25.5 million. 

Netflix has crossed over from being reliant on its DVD business, to a fast-growing content provider and a producer of original content that even cable companies want their customers to have access to, as the Virgin deal shows. Is the stock a buy at $300? By most any metric it's expensive. But where 2011 saw a decline in customers and a business in transition, 2013's Netflix is executing on its expansion plans, and offering a clear path forward for sustained long-term growth. Sounds like the kind of company worth owning to me. 

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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 September 16, 2013, at 10:24 PM, oatmeal33 wrote:

    Jason, c'mon..

    If you want to be paid to write pro articles, can't you be bothered to get your words right?

    "investor confidence is as high as it's even been..."

    You can't be bothered to proof your own writing enough to catch that it should be 'ever' instead of 'even'?

    "has managed to continue to eek out growth..."

    The word is 'eke', not 'eek'...totally different meaning...

  • Report this Comment On September 17, 2013, at 12:28 AM, TMFVelvetHammer wrote:


    Ha! Good catches. I'll blame my copy editor!

    Seriously, thanks for pointing out these things. I'll have them fixed ASAP.

    And should I take it as a compliment that you're complaint was a couple of words, versus challenging the content itself? Isn't that what's most important?

  • Report this Comment On September 17, 2013, at 2:10 AM, 12OnAHunch wrote:

    Wouldn't you say it helps that over 95% of the shares are owned by institution and as long as they don't dump a large amount of the shares and short sellers keep trying to make a buck the price will remain high if not go higher.

  • Report this Comment On September 28, 2013, at 10:18 PM, oatmeal33 wrote:


    You're welcome.

    Yes, you should take it as a compliment that I complained about a couple of words instead of the content.

    Good use of sarcasm!

    At least you comprehend the concept of sarcasm, if not the difference between "you're" and "your" -- (look closely at your reply to my don't seem to have even a basic, elementary school grasp of the difference between these two completely different words...). Good luck with your professional writing career if you can't nail down 5th grade level stuff like this. Keep up the snark in the comment replies -- and, the (very entertaining) ironic mistakes that many 10 year olds wouldn't make. Way to grow as a person and writer..

  • Report this Comment On October 04, 2013, at 4:03 PM, TMFVelvetHammer wrote:

    Hi again oatmeal33.

    Glad you came back and saw that I replied to your comment. I'm also glad that you noticed my misuse of "you're."

    The question, good sir (or ma'am, since you are well-hidden in the ether of anonymity) is whether it was intentional, or accidental? Was it a morsel for the trolls? Maybe just a bit of good fun? Even an attempt at humor, though you may have missed the joke?

    I leave it to you to decide.

    Nonetheless, I was honest in my appreciation of your having pointed out the error. And for what it's worth, sarcasm shouldn't always be viewed through a negative lens. Sometimes it's dissembling humor.

    Maybe I'm not the only one that has some growing to do, though I admit freely that I most certainly do.

  • Report this Comment On October 09, 2013, at 10:47 PM, oatmeal33 wrote: you're saying you wrote "you're complaint" intentionally, to be humorous or clever or something? Uh huh. Wow, yeah, I did miss the joke! Good one! Golden, really. Will you be here all week? Should we be sure to tip the waitresses that are serving the borscht?

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