Why Netflix Is Still a Buy

With Netflix (NASDAQ: NFLX  ) shares up big this year and touching new all-time highs, are the video streamer's best gains in the rearview mirror? Not according to Fool contributor Demitrios Kalogeropoulos.

In the video below, Demitrios argues that Netflix's growth in Canada points to the potential for huge contributions from its international markets in the years ahead. Also, the company's recent Emmy wins underscore the success of its original content strategy, and will make it easier to attract quality talent from here. That's why, as a long-term shareholder, Demitrios remains bullish on the stock even at these lofty levels.

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Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On September 24, 2013, at 7:04 PM, KFcard wrote:

    The valuation of Netflix is out of the Universe!! The concept is great, but the content is not. If you were to take a proven company, such as Apple, and apply Netflix's ridiculous P/E (31x higher), you would arrive at a share price over $15,000!! Netflix had less than $1B gross and only $17M net! I, along with many others, are completely dumbfounded at Netflix's current levels...

  • Report this Comment On September 24, 2013, at 10:25 PM, MFMotleyStool wrote:

    More hype and baloney. They don't own this original content and winning an Emmy only drives up the future costs of content. This is a MOMO stock and all of the FOOL buffoons are simply playing silly MOMO games with silly fluff commentary like this one and no substance. What about the financials, mounting debt and much of it off balance sheet are no way to run a public company. Why would it be off balance sheet? Why are they amortizing some of this content over 2-4 years when it is immediately consumed and no longer their content such as House of Cards? Over aggressive accounting on a MOMO stock sounds more like Enron then any long term viable company. Stop the endless pump charade. Would this guy buy shares here while he tries to tell us with a straight face that it's a good long term buy. BS times 20. Friggen lying sack of you know what.

  • Report this Comment On September 24, 2013, at 10:34 PM, Arek333 wrote:

    I think Netflix IS still a great buy. I think they could be a little more modern with a few minor changes:

    1) Make it easier to find movies by category

    2) Make it easier to find ANYTHING

  • Report this Comment On September 25, 2013, at 8:32 AM, pauldeba wrote:

    Comparing Canada to all other international markets is foolish. Canada is almost identical in culture and practices to the US. Latin America and Continental europe is completely different.

    So, it may mean something for the UK, Aus/NZ, the Philippines and South Africa, but it means nothing elsewhere.

    I am not sure what "enormous" profits are, but I have a hard time getting them over $7 a share per year under the best case scenario and that's with limited successful competition.

  • Report this Comment On September 25, 2013, at 9:16 AM, 24penny wrote:

    I'm not buying into the international market hype either. Being a matter of scale, the market sizes aren't big enough to be profitable with the current buisness model. They're barely profitable with and 88MM household market like the US. How can they expect big things from Europe when its broken into several smaller markets, each with its own content licensing agreements?

  • Report this Comment On September 25, 2013, at 9:36 AM, TMFSigma wrote:

    Thanks for the comments, but I see a pretty simple strategy that's plainly working for Netflix. Contribution margin from its U.S. streaming business has jumped from 14% in Q1 of last year to 24% at the midpoint of this quarters' guidance. Meanwhile, international members will almost triple over that time to 9 million (again at the midpoint of guidance).

    Losses overseas are swamping the rising profits from the U.S., but that won't continue forever. So it makes perfect sense to scale up internationally and sacrifice those company-wide profits for now.

    Best,

    Demitrios

    TMFSigma

  • Report this Comment On September 25, 2013, at 10:34 AM, pauldeba wrote:

    "that's plainly working for Netflix."

    Did you factor in the continual loss of DVD margin?

    Even at 9 million and stable costs, they still lose money contributionwise internationally. Growth seems to come from new markets with new huge costs. Latin America seems to have been a huge, expensive mistake and that won't change. The R$15 Real plan in Brazil has gone from $7.60 a few months ago to $6.20 last month.

    They need $1 billion of contribution every quarter in order to justify the current market price, how on earth are they ever going to do that when they have already grown the customer base so much the last few years? They get $85 million streaming contribution now. At the very least it seems that analysts and investors have branded a near certainty on Netflix future domination, which is ,quite franly, absurd.

  • Report this Comment On September 25, 2013, at 11:05 AM, TMFSigma wrote:

    Hey @pauldeba, the valuation really isn’t that crazy, I don’t think. Leaving out the declining but still profitable DVD business, at $18 billion you’re buying Netflix’s U.S. streaming biz for about 30 times the $560 million profit it saw over the last 12 months. The margin there has been steadily improving, as I mentioned, so that multiple isn’t nuts.

    But you also get an international streaming business that’s growing in subscribers but not yet profitable. Sure, if you think the overseas expansion is doomed to widening losses then you’re probably paying too much for the U.S. profit machine. But if new international markets get profitable as they mature, as was the case in Canada, then $18 billion doesn’t seem all that expensive.

    -Demitrios

  • Report this Comment On September 25, 2013, at 12:28 PM, 24penny wrote:

    Sure US looks profitable from a 'Contribution Margin' perspective but that, to me, seems like an accounting smoke screen because they don't allocate all the expenses. Next report of subscriber growth should give us an idea of the saturation level. I suspect they are closer than they let on.

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