Netflix (NASDAQ:NFLX) reports tomorrow.
There's a lot riding on the leading video service's performance. The stock has nearly doubled since bottoming out this past summer, even though it would have to more than triple from here to hit its all-time highs established two summers ago.
Now, it's easy to get excited.
Janney Montgomery Scott analyst Tony Wible -- who has been a permabear on Netflix since 2007 -- finally turned. Upgrading Netflix to a buy with a $129 price target is pretty significant for a Wall Street pro who's been cemented on sell or hold for nearly six years.
Wible is encouraged by the company's recent content deals and the way that content creators and cable providers are viewing Netflix. It has more than 25 million streaming subscribers in this country alone. It can no longer be ignored.
Wible also points out that the competitive threats just aren't there.
Amazon.com (NASDAQ:AMZN) has ramped up its content, but third-party reports indicate that Amazon Instant Video usage is just a sliver of Netflix's engagement. Hulu has carved out an interesting niche in streaming television shows, but it hasn't gotten in the way of Netflix's growth. Coinstar (NASDAQ:OUTR) may one day pose a threat with Redbox Instant, but the platform is still in beta and limited largely to movie titles that are already available through Netflix.
Analysts are braced for a quarterly deficit out of Netflix, and rightfully so. The company itself warned of the red ink as content deals and international expansion more than offset domestic profitability.
No one expects Netflix to post a gain in its DVD-based accounts. CEO Reed Hastings revealed last year that sequential declines are expected there forever.
The optical disc is fading as a meduim. Blockbuster parent DISH Network (NASDAQ:DISH) announced over the holiday weekend that it would be closing another 300 stores. Some may argue that this move will benefit Netflix's mail-based platform or Coinstar's Redbox kiosks, but all this will do is ultimately push more customers into consuming video digitally.
Silver Linings Playbook
Another metric that will go in the wrong direction -- beyond the bottom line and the shrinking number of disc-based accounts -- is average revenue per user.
Netflix has no intention of moving away from its $7.99-a-month streaming plan, and the average revenue per member will continue to drift lower as folks on multi-disc plans continue to downgrade their service or kill off the optical disc deliveries entirely.
A popular knock on Netflix is that its streaming content lacks fresh titles. They're too expensive, and studios are apprehensive about diluting the perceived value of new releases by making them part of a $7.99-a-month buffet.
If this was a game changer, Amazon would be doing far better here. It offers fresh digital releases as pay-per-view streams alongside its smaller unlimited smorgasbord. Redbox Instant would be generating more buzz by offering new content as a la carte digital streams and through its physical kiosk rentals.
Until we see Amazon or Redbox gain traction, there appears to be little reason for Netflix to follow the laggards. It would be a great way to boost the sluggish average-revenue-per-user metric, but for now it's just not necessary.
The Hunger Games
Investors have to be realistic here. Netflix isn't going to top $300 again anytime soon. That was a price modeled on a much higher average revenue per user than $7.99 a month, at a time before optical discs began growing out of favor.
However, just as investors have pushed Amazon higher despite shrinking margins -- embracing a model that is sacrificing near-term profitability for long-term market share -- investors are also starting to come around to Netflix's thinking.
Conquering the world is going to be easier to do now than it will be in a few years when more competitors are entrenched. Sticking to the absurdly low $7.99-a-month price point will also keep rivals from inking the kind of content deals that they would need to level the playing field with Netflix.
It's hard to get a read on exactly what Netflix will offer up tomorrow. The former dot-com darling stopped putting out churn metrics more than a year ago, and Netflix finds itself revising its outlook more often than not at its quarterly outings.
However, there's no denying that Netflix offers a solid product at half the price of the premium movie channels that require costly cable and satellite television plans. As more homes go Wi-Fi and more home theater appliances make it easier to stream video, Netflix is the runaway leader as the greatest beneficiary of these welcome trends.
There's always the chance of the stock taking a stumble on an operating hiccup tomorrow, especially after the shares have run up so high over the past few months. However, there has to be a reason that a prolific longtime bear wanted to get on the bullish side of this trade ahead of tomorrow's report.
Good luck to those that chose not to follow suit.