Netflix: A Strong Buy on the Pullback

In spite of the headwinds that Netflix faces from greedy Internet-service providers like Comcast, the company is in a very strong position to grow its revenues, subscribers, and earnings. Netflix's global expansion plans and compelling consumer services will make the company far more valuable in the years ahead.

Apr 1, 2014 at 5:30PM

The stock price of Netflix (NASDAQ:NFLX) has dropped from its high in the $450s to its current levels. There has been speculation about Apple (NASDAQ:AAPL) and Comcast (NASDAQ:CMCSA) trying to work together to structure an Internet-to-TV streaming deal. This sizable drop in stock price represents a great buying opportunity for long-term investors. 

Apple-Comcast deal will have no impact
When rumors surfaced about Comcast talking with Apple to deliver TV and on-demand video through the Apple TV set-box, the stock price of Netflix took a big hit. This piece of news, even if it is true, is highly immaterial for Netflix and its shareholders.

Comcast will most likely appear as an app on the menu of Apple TV, just like those of Hulu and Netflix. Comcast will certainly only make this deal available to its subscribers, and it will give consumers more options but it provides almost no benefit to someone who does not have an Apple TV device. Cable companies like Comcast and Time Warner Cable have been increasing their prices regularly but they have done little to deliver extra value to consumers. Not surprisingly, they rank among the lowest providers in terms of consumer satisfaction.

Toll collection a potential headwind in near-term
Netflix has started to see some headwinds from the weak net-neutrality laws, as it has disclosed that it paid Comcast to make sure that Netflix customers get higher-quality video. The company's CEO Reed Hastings wrote on the company's website that he believes ISPs like Comcast will start demanding tolls from other smaller service providers even though consumers pay them monthly subscription fees for high-speed Internet. This arbitrary tax will increase costs for consumers.

In other words, Netflix stated that the ISPs charge customers for high-speed Internet while also pressing Netflix and other high-traffic sites to pay them 'a toll'. This phenomenon will not likely continue for too long, as strong net-neutrality laws should help all parties involved: ISPs, service providers like Netflix, Hulu, YouTube etc., and consumers. However, in the wake of cable-industry consolidation this might become a headwind for Netflix and drive up its operating expenses in the near-term.

Compelling unique value proposition
In spite of the rumors and the placement of Internet tolls on the company, Netflix delivers an incredible value proposition to consumers at its price point of $7.99/month. The company has amassed more than 44 million subscribers, and based on its management's guidance it should end the first quarter of 2014 with more than 48 million subscribers in more than 40 countries. 

The company's brand value is on the rise and it has disclosed plans to expand into Europe, which will enable Netflix to build a global Internet TV franchise. In addition, the company's increasingly large content base includes highly valuable Netflix originals that include House of Cards and Orange is the New Black. Netflix has been constantly adding more and more original content with the large amount of subscription revenue it earns.

Netflix recently stated that it will bring back the political drama House of Cards for a third season. The addition of more high-quality original shows will result in additional subscriber gains. The company's revenue and earnings per share should get sizable boosts from this growth in subscribers. 

Going forward
Netflix does trade at rich valuations, but the company's subscriber and revenue growth have been phenomenal. Netflix delivers very attractive benefits to consumers. The agreement with Comcast will result in higher operating expenses, but it will ensure better-than-ever streaming quality and customer service.

Netflix trades at a forward P/E of 47.7, and owing to the subscription business model of the company, the company's earnings can ramp up quickly after the big investments in Europe have concluded. In 2014, Netflix is expected to grow its Diluted EPS by almost 130% year-over-year from 2013, so the high valuation multiple is justified.

The company is diversifying its revenue base across the globe and adding more and more original content. The company's current pricing model gives the company immense pricing power as well. Years down the road, Netflix will be a far more valuable franchise. 

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information