I'm not normally one to make an investing argument based on arbitrary milestones or my personal preference for a product. But I have to admit, as much as I love getting DVDs in the mail, and as much as Netflix (Nasdaq: NFLX) has been pummeled by the market recently, I'm starting to wonder whether I shouldn't put some of my money into the stock rather than just the movie queue. The firm trades for just more than half a billion bucks, which is about equal to last year's revenues. Profitable fast-growers whose corporate names have become verbs don't usually come so cheap. And today, Netflix announced that it had reached 3 million subscribers.
On one hand, 3 million is just a number, but on the other hand, it means a lot. You need only look at my colleague Rick Munarriz's Stock Madness piece -- which cites the year-end total of 2.6 million -- to see how quickly Netflix can move. It's still gathering an impressive base and still at an impressive speed. And as other Fools have argued, a big and growing pool of subscribers is not only the source of the firm's much-needed revenue growth but also the core of its competitive advantage. Briefly put: More users means smarter software, and a better ratings system, something that I find pretty important as a Netflix customer.
It took from 1999 until 2003 for the firm to gather its first million. The next million was under the belt by May 2004, just more than a year later. This third million took only 10 months to gather. This is one of the advantages to being the first mover in a new field, one of those Rule Breaker things.
The trouble for investors, of course, is that this is still a scary story. There's a war for hearts and wallets with Blockbuster (NYSE: BBI), as well as old-school competition from bricks and mortar Movie Gallery (Nasdaq: MOVI) and probable takeover target Hollywood Video (Nasdaq: HLYW). Plus, there's the threat from Amazon.com (Nasdaq: AMZN). The infighting indicates that the movie-by-mail model will continue to have legs, at least until the nation's broadband infrastructure can better support video on-demand, but where does that put the investment?
Earnings estimates are all over the place, and the ongoing price war can invalidate anyone's revenue models with the stroke of a pen. At its crux, an investment in Netflix is still a faith-based initiative, but for today, at least, there's a bit more hope.
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Seth Jayson is a happy Netflix customer, but at the time of publication, he had positions in no firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
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