It seems like only yesterday that DVD rental specialist Netflix (NASDAQ:NFLX) had landed its millionth paying subscriber. OK, technically it happened last year in February. However, now that the company's client base has topped the 2 million mark, where does the budding multimillionaire go next?
The answer isn't as easy as 3 million, naturally. With the early adopters signed up and the game turning to market penetration, the road doesn't get any easier.
What is apparent is that many of the fears put up by the company's critics proved to be unfounded. There was a time when some feared that retailing juggernauts like Wal-Mart (NYSE:WMT) and Blockbuster (NYSE:BBI) would eat Netflix's lunch. It turns out that they're still ordering from the kids' menu.
Video on demand (VOD) was supposed to expose Netflix's mail-delivered model as a snail-paced dinosaur. However, while the cable companies continue to make strides in broadening their selection and incorporating more flexible viewing features, there seems to be plenty of VO but not enough of the D.
The prospects are even dimmer for movie studios like Time Warner (NYSE:TWX) and Sony (NYSE:SNE) that are trying to persuade movie buffs to squint in front of their laptops and PCs through their Movielink offering.
So maybe it's time to let Netflix walk the red carpet proudly amid the flashbulbs of the cynical paparazzi. It's earned the spotlight. The stock proved to be a great trade for Stock Advisor readers last year, with the stock nearly tripling between the buy and sell recommendations. But it better not rest on its laurels.
The company closed out the June quarter with just 3% of its subscribers on free trials. I can't recall it ever being that low. The initial reaction may be that it's a blessing for Netflix to find 2,024,000 merrily paying customers. It clearly vindicates the product and, just as important, given the company's recent price hike, its value. But having just 69,000 more users taking the company up on the free trials isn't that comforting.
Why? Because that's where the future growth will come from. While Netflix was able to grow its user base by 82% over the past year, and it's only logical to expect that pace to slow with every passing year, one is left to color in the degree of that gradual decline.
A year ago, the company had 46,000 users kicking its virtual tires. So 69,000 temporary freeloaders is an improvement, but only to the tune of 50%.
The beacon of hope is that the rest of the country will follow the San Francisco Bay Area's lead. While it is the company's home turf, signing up 7.6% of the area households is impressive. Market penetration everywhere else is at just 1.8%, but climbing.
So keep a cautious eye on that beacon, but don't be surprised if it winds up becoming yet another spotlight worth shining on the company.
For a great read on the current state of Netflix, check out this week's column by Daniel Hong.
With so many summer blockbusters coming out these days, which ones are worth putting up in your Netflix queue? Which ones are best to avoid? All this and more in the Great Movies discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz singled out the stock in the October 2002 edition of TMF Select, which later evolved intoMotley Fool Hidden Gems. It was a memorable call, given the fact that the stock was bottoming out at a split-adjusted $5.45 a share at the time. Rick has been a Netflix customer -- and shareholder -- since 2002.
