Fool Video: Missing Out on Netflix?

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By JSergeant
October 16, 2007

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Fool Video: Missing Out on Netflix?
By Mac Greer October 15, 2007

Shares of Netflix (NASDAQ: NFLX) are up about 50% since July. Will Netflix continue to appreciate, or have investors missed out? Do Blockbuster (NYSE: BBI), Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN) pose significant competitive threats to Netflix? Will Netflix beat, meet, or miss out on earnings expectations? In this installment of "Missing Out," I talk movie stocks with Motley Fool senior analyst Rick Munarriz.

I have now watched the video. Personally, I don't agree with Rick's conclusion that NetFlix will fall back next week. His main point seems to be the fact that NetFlix has not offered upward guidance on subscriber numbers. But I am not sure that NetFlix has any obligation to do that. From my analysis of the stats, it looks quite likely that NetFlix will come in above their projected subscriber numbers, and even if some of the increase in Compete's People Count is due to increased usage of Watch Instantly on additional computers, that is likely to contribute to decreased churn. Also the intro to the interview with Rick emphasized that NetFlix was up 50% since the summer, but you must bear in mind that this is simply a rebound from the precipitous fall when NetFlix announced it's first ever quarter over quarter subscriber drop, due to the fact that BlockBuster was running Total Access as a loss leader. BlockBuster has increased their pricing on this and cut back on promoting it. So we are basically back to where we were before that drop.

My opinion is that NetFlix will announce significantly higher than expected subscribers numbers, trumpet the success of Watch Instantly, and possibly even show better than expected profit. The stock will run up to $30 and probably higher. After all we even have the NetFlix perma-bear Pachter upgrading NetFlix to a buy, with a $30 price target. On the one hand, Pachter has such an atrocious track record, that maybe we should take this as a sell signal, but on the other hand maybe he has finally seen the light and got it right!

Anyway, the last thing I want to do is persuade anyone to buy NetFlix based on my opinion. I have not been buying at these prices, but I was buying in March, June and September based on selling puts, at a cost basis of $20.95, $20.85 and $17.85 respectively.

I also bought LEAP calls as follows:

Jan 09 $15 calls
7/24/07 $4.50 last price $10.10 gain 123% - nice to catch the bottom

Jan 09 $20 calls
4/19/07 $5.20 last price $7.29 gain 40%
6/13/07 $4.10 last price $7.29 gain 78%
7/24/07 $2.60 last price $7.29 gain 180% - nice to catch the bottom

Jan 09 $30 calls
4/19/07 $2.05 last price $2.05 gain 48%

I also own a large number of shares - I have been invested in NetFlix since 2002 at a price as low as $4.04 (adjusted for splits) and I have sold in 2003 as high as $40. It is still my largest holding.

If (when) NetFlix hits $30 or runs above that, I will likely sell a significant number of shares and sell some of my calls. There are likely to be a lot of people like me who either bought stock under $20 in the summer or bought calls, who will see $30 plus as a good place to lock in profits, so NetFlix may have a hard time going much above $30, at least initially. All the same, I also like Netflix as long term winner, as long as you are willing to endure the volatility. Watch Instantly is the best implementation of VOD which I have seen, and as soon as Netflix comes out with a box to get this to the TV, the share price could take off.

Anyway, sorry for the long and rambling post. I just wanted to put out a fair and objective assessment of NFLX. Everyone needs to make their own decision as to whether to buy now.