Digital media pundit Dan Rayburn knows a lot about the market he covers, and he's not afraid to tell you so. But even the greatest of analysts gets the occasional call wrong, and I believe I just caught Mr. Rayburn with his foot in his mouth.
Delicious, no?
In a recent blog post, Rayburn says that Netflix (Nasdaq: NFLX), Amazon.com (Nasdaq: AMZN), Akamai Technologies (Nasdaq: AKAM), and other media technologists are all caught up in an excited market frenzy not unlike the dot-bomb bubble of ten years ago. Rayburn:
Today, just about any company involved or associated with streaming movies or TV shows over the Internet seems to have valuations that we haven't seen in quite a few years. While there is nothing wrong with being excited about what's taking place in the market and the growth we are seeing in digital content consumption, many have now set expectations for these companies that simply can't be achieved.
There is no doubt that digital is growing, but online video is not replacing cable and streaming movies are not replacing DVDs today, or any time soon. Seismic shifts like that don't happen overnight or over a few years but rather usually over a long period of time, measured by a decade or more. To put it in perspective, Netflix has only been streaming for three years and while they have been the hands down leader, DVDs and cable TV are still around in volume. (emphasis mine)
We could argue all day about the promise of digital media or the rate at which online movie streams and direct downloads are replacing cable TV and DVDs, but I'll leave all that for another day. What really raises my hackles about Rayburn's argument is the way he "puts it in perspective."
Let's put it right back, then
Let's compare the current situation to the rise of the DVD format, shall we? In 1997, the first DVD players went on sale in America. Three years later, American consumers snapped up about 100 million DVD discs at retail for about $1.9 billion as part of the quickest technology ramp ever witnessed. But VHS tapes still ruled the rental racks. Five years after that, Best Buy (NYSE: BBY) and Wal-Mart (NYSE: WMT) had stopped selling tapes. The changing of the guard was complete.
If each of Netflix's 15 million subscribers stream a full movie every other month or so, Netflix is already ahead of the growth rate of the DVD medium in 2000. That's just one company, albeit the clear leader in the space, versus the ghost of an entire industry. It's a better story this time.
Been there, done that
Mr. Rayburn, we've been here before. Our Foolish founding father David Gardner first recommended Netflix to his Stock Advisor subscribers back in 2003, only to back out again six months later with a nice 160% return on the investment. CEO Reed Hastings had lost David's trust by aiming too high when he declared and ambition to become "one of the world's leading media companies" in 10 to 20 years.
That ambition is still alive and well on its way to fruition. The streaming success is not an overnight surprise but the result of a long and deliberate plan. And we've ain't seen nothing yet: Just as the DVD medium didn't explode until Sony (NYSE: SNE) introduced the PlayStation 2 as the first truly capable, affordable, and multifunctional DVD player, Netflix is building toward a critical mass right now.
And all signs point to the company signing flat-rate licenses with the studios rather than paying a fee per view; for example, the Epix deal has a definite price tag and not a guesstimate based on expected customer usage. Netflix is also very tight-lipped about actual streaming traffic, but would probably have to disclose that one way or another if its expenses depended on that volume. And finally, it just makes economic sense. More subscribers with a relatively fixed cost structure means more profit, and that appears to be exactly what Netflix is shooting for.
So with all due respect, I have to disagree with Dan Rayburn this time. Stock Advisor has re-recommended Netflix five more times since that sell order in November 2003, with returns ranging from 498% to 1,147%. The company would have felt right at home in our home-run-seeking Rule Breakers service where Baidu, the strongest of many fine stocks recommended, stops at a mere 1,144% return to date. And I believe the best is yet to come.
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