Even After Falling $100 per Share, Is Netflix a Buy?

Netflix shares are well off the all-time high, but with increased competition from Amazon and others a growing reality, is it worth buying?

Apr 10, 2014 at 10:30AM

Back in summer 2011, Netflix (NASDAQ:NFLX) shares were pushing $300, and I stayed as far away from the stock as possible. Don't get me wrong -- I love the company. I've been a subscriber for years, and the streaming service became a favorite in my home soon after it was launched. However, I thought the company was wildly overvalued. Even as it fell to $200, I viewed Netflix stock as pricey for what it delivered. 

Netflix Fool

Original content is part of what makes Netflix a great growth stock even today.

Then came "Qwikstergate." As the company prepared to split the service into separate parts for DVDs and streaming -- including what would be two different websites, queues, and bills -- and to nearly double the price for some customers, Netflix suffered its first quarter of declining subscriptions in years. By October, shares were in the $70s, and I was a buyer. Of course, they'd fall even further -- approaching $50 during summer 2012 -- but the return of growth, Carl Icahn taking a big stake, and even rumors of an acquisition all helped the stock bounce back strongly. The question now is whether Netflix is a good place to invest as its competition grows stronger, including Amazon.com (NASDAQ:AMZN) expanding further into content delivery with the new Fire TV set-top box and rumors that the e-commerce king will begin adding new features to its Prime service after increasing the annual fee by 25%.

Shares are now around $350, a substantial fall from the recent all-time high of $458. Is this a good time to buy?

NFLX Chart

NFLX data by YCharts.

Best CEO or worst CEO?
Investing in Netflix has to be at least partly based on leadership. Founder and CEO Reed Hastings was lambasted by the financial media over the Qwikster debacle, named worst CEO by many in 2011. Frankly, in many ways he earned the title, considering that the share price fell from $300 to $65 in less than six months. However, the speed with which the company reversed course from Qwikster, while sticking to its guns on increasing the price for the real value that the two separate services provided, reflects well on the entire management team. 

So here we are, a couple of years removed, and Hastings is considered a darling among CEOs, even rumored at one point to be in the running for the top job at Microsoft. The reality is, Hastings and his team don't manage the business to the stock price, instead focusing on what matters: providing great content to subscribers at a price that is a value to the consumer and profitable to the company. At the end of the day, this is what will create long-term shareholder value. Considering that Hastings holds almost 1 million shares, it's probably fair to assume that he's vested in the long-term success of the company. 

Competition from a big partner?
Netflix and Amazon are actually partners, with Amazon hosting much of Netflix's content on Amazon Web Services. Amazon actually features Netflix as a case study for AWS. However, the two compete head-to-head for streaming content, with Amazon Prime providing -- in addition to two-day free shipping -- thousands of movies and TV shows for streaming, all for $99 per year. Amazon's new Fire TV box will feature Netflix; the company's marketing actually gives Netflix the first mention, and the Netflix logo is the first one shown:

Amazon Fire Tv

Will Fire TV take market share from Netflix? Source: Amazon.

Nonetheless, Amazon's business is reliant on growing its digital distribution. 

But it's about paid content
My thesis for Amazon's digital content has long been that Prime is less about offering free content, and more about creating a beachhead strategy in order to sell premium content. My own personal experience is proof of that, if anecdotal. My family initially subscribed to Prime for the shipping benefit. However, we cut the cable cord more than two years ago. Over that time, Amazon Instant Video has become a mainstay in my house, almost as much as Netflix. The difference?

We are paying for content we don't want to wait to show up on Netflix. 

We are huge fans of The Walking Dead, which we started watching on Netflix. But as soon as my family finished season 2, we couldn't wait for the next season to come out on Netflix, so for about $2 per episode -- or $8 per month for the few months that the season was on TV -- we watched the new season on Amazon. We've done that for the past two seasons, and with a few other TV shows as well. But Netflix is still our primary "channel."

Simply put, Netflix just has more of the content we are looking for than Amazon Prime, and does a better job of recommending new things to us. But considering that we get more programming than we could possibly want for less than $17 per month combined -- plus that free shipping -- bundling the two is a fantastic deal for us, and apparently for millions more people who are leaving cable and moving to a streaming lifestyle. 

Final thoughts: It's still about the growth story
As the Fool's Jim Mueller points out in this article, Netflix is still growing like crazy. Domestic subscribers are increasing at more than 20%, and international growth -- the real long-term opportunity  -- an astounding 78%. Neither Netflix nor Amazon look good using the typical valuation measures, but both companies are really good at generating a ton of cash. For now, they are both pouring it back into the business to fuel growth. 

And despite Amazon's continual growth in streaming, Netflix looks great today. 

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Jason Hall owns shares of Amazon.com and Netflix. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, Microsoft, 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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