Netflix Is a Great Buy for 2014

Netflix is still the top player in subscription video-on-demand.

Jan 6, 2014 at 6:20PM

Online video giant Netflix (NASDAQ:NFLX) is sitting pretty with more than 40 million subscribers. Netflix stock was the second-best performer in the U.S. market in 2013, with shares up almost 300%. But based on the booming growth in subscribers in the domestic and international markets, and its growing portfolio of original and exclusive content, Netflix still has solid upside in 2014. 

Domestic has room to run
Netflix's standard monthly subscription service offering, priced at $7.99, represents a great bargain for consumers. Considering the low price point and an increasingly wide breadth of content, including a great mix of premium and original shows and a superior user interface, it is reasonable to believe more U.S. households will subscribe to Netflix. The company has recently begun testing a variety of pricing plans that start as low as $6.99 a month for a single streaming plan.

The company had 31 million domestic subscribers at the end of the last quarter. The company's business model commands huge operational leverage, because most of the content costs of Netflix are primarily fixed costs. As a result, a large subscriber base will drive the company's contribution higher and boost its earnings per share. 

Netflix's management has stated that the company's U.S. opportunity stands at 60 million to 90 million. Based on the lower end of that guidance, Netflix will be able to rope in another 30 million new domestic users. Netflix how has more U.S. subscribers than Time Warner's (NYSE:TWX) HBO. While HBO doesn't disclose its subscriber numbers, estimates from research firm SNL Kagan stood at 28.7 million at the beginning of 2013. And HBO is adding roughly 50,000 subs a quarter, while Netflix added 1.3 million domestic subs in its third quarter.

Of course, there are other subscription players. Ad-supported Hulu has 5 million paying subscribers and's Prime service has more than 20 million members. Netflix offers a much better user interface and more content compared to its competitors, which should keep its domestic subscriber base growing, and its churn rate should drop to a record low. Netflix is extracting incremental revenue from a small group of consumers through tiered pricing plans, like family pricing at $11.99 for four simultaneous streams. 

Netflix Originals
Netflix had a fantastic 2013 based on its very successful original content strategy. The company's shows like House of Cards and Orange Is the New Black have been instrumental in growing Netflix's global brand value. 

Management stated it will increase its original content budget from 10% of its total content expenditures to much higher levels, to the tune of 15% to 20% in 2014. Netflix is spending close to $3 billion a year for content, and if the company allocates 20% of that toward developing high-quality originals, it will have a much more robust original library. The development of more Emmy-winning shows will attract newer audiences to Netflix, and give the company more pricing power.

Amazon and Hulu are developing their own originals, but Netflix has been a lot more successful in building high-quality franchises. The company will be unveiling season two of the critically acclaimed House of Cards in February. And a much larger original library similar to Time Warner's HBO will lay the foundation for possibly raising prices modestly to $8.99 or $9.99 a month, and still remain a valuable service and a bargain for consumers. 

International growth and profitability
Netflix has been growing its international business by reinvesting the profits from its domestic DVD and streaming business. As a result, the company now has 9.2 million international subscribers in roughly 40 countries. The rapid growth in domestic contribution profits will enable the company to invest heavily in its international segment, which is a gigantic addressable market.

And the company hasn't even launched in a number of large markets, such as Russia, China, and India, which makes it reasonable to believe that its international user base could one day surpass its domestic subscriber count easily.

In terms of profitability in the international market, Netflix should continue to lose money in the near term as it is investing heavily in building large localized content libraries for each country/region. The only profitable country in the international segment is Canada, and as other markets mature, Netflix's profitability should get a major boost. 

The takeaway
Netflix can easily grow its penetration rates in the U.S., and gain a lot of new members in its international segment. The company's management team has done a fantastic job of widening its moat and executing on its long-term vision. Netflix has a number of years of double-digit revenue growth ahead, and will receive substantial tailwind from secular consumer trends. Taking all these factors into account, Netflix seems headed higher in 2014.

Profit from the battle for your living room
Television, as we know it, is on the verge of a transformation. The companies that prevail in this epic disruption could go on to earn their shareholders untold sums of money. And the companies that lose could very well end up in bankruptcy court within a matter of years. With this in mind, our top technology analysts created a groundbreaking free report that sorts out the likely winners from the losers. In doing so, they reveal the handful of companies that are best positioned to make their shareholders exceptionally rich over the next few decades. To download this invaluable free report before the rest of the market catches on, simply click here now.

Fool contributor Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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