Quo Vadis, Netflix?

There has been some speculation on the Fool's Netflix discussion board as to what the company intends to do with the $100 million it recently raised from selling more shares. According to a recent interview with Netflix CEO Reed Hastings, there are no nefarious plans afoot to acquire Blockbuster (NYSE:BBI) Online or anything like that.

Hastings says he will just "put it in the bank," given that several potential competitors are sitting on massive cash balances. Reed singles out Yahoo! (NASDAQ:YHOO) and Apple (NASDAQ:AAPL), which have $2.4 billion and $8.2 billion of cash on hand, respectively, and notes that it is "prudent to have more than we did before. We had about $200 million; now we have a little more than $300 million."

The interesting things here are the companies Hastings sees as potential competitors, and the reasons he's piling up cash now rather than later. I don't think that anybody expects Apple or Yahoo! to start shipping DVDs around the country. Hastings' strategy lends some more credibility to Netflix's plans to move into movie downloads, and fairly soon at that. You don't stock up on reserves now for scenarios that are still years down the road.

On the other hand, Hastings mentioned that he sees a lot of room for growth in the DVD-rental market, since his company's $1 billion of trailing revenues is still a small number next to Blockbuster's $6 billion or Movie Gallery's (NASDAQ:MOVI) $4 billion. So while there is opportunity in the download and on-demand markets, operations at the company will still largely be fueled by DVD rentals for the foreseeable future. Netflix management has taken every opportunity to hammer home the point that the physical DVD is far from extinct, and that it will take a long time for Internet delivery to take over.

Still, I think it's important for Netflix to get in on the ground floor of the coming revolution, work out the kinks in the system early on, and start building a customer base right away. That way, the company won't have to play catch-up to Amazon (NASDAQ:AMZN), Apple, Google (NASDAQ:GOOG), or whoever else might have caught an early ride on the video downloading bandwagon. It's good to see management seeming to agree with my own assessment of the situation. Carry on, gentlemen.

Further Foolish reading:

• Foolish colleague Rick Munarriz was also wondering about the extra $100 million.
• He also took a peek at the Blockbuster lawsuit.
• Check out the pro and con cases on Netflix.
• And remember, the biggest companies aren't always the biggest winners.

Netflix and Amazon are Motley Fool Stock Advisor picks. Take the Fool's flagship newsletter service for a free 30-day spin to see what the excitement is all about.

Fool contributor Anders Bylund owns shares in Netflix but holds no other position in any of the stocks discussed today. Foolish disclosure is fast, free, and always on time.