Please ensure Javascript is enabled for purposes of website accessibility

Is Now the Right Time to Buy Netflix Stock?

By Chris Neiger - Apr 25, 2013 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

So far, Netflix's stock has been on a great run this year and the company is riding on the success of its latest original content. But investors have a lot to consider before jumping in with the video streaming company.

Buying a stock obviously comes down to many factors, and the final decision ultimately rests on personal preference. But to help investors decide whether or not now is the right time to buy Netflix (NFLX 1.98%) stock, let's take a look at the advantages the company has as well as the hurdles it's likely to face in the near future.

What's going right for Netflix
It's been a monumental few months for the video-streaming darling. The stock is up more than 124% since the beginning of the year and 113% year over year. With its latest earning report release, the stock jumped 24% on Tuesday. But stock fluctuations aren't a good reason for buying a company's stock, so let's look at what Netflix is doing to create those gains.

This past quarter, Netflix increased U.S. subscribers by 2 million, bringing its total U.S. subscriber base to more than 29 million. Part of the subscriber increase is likely from its hugely popular original series House of Cards that aired a few months ago. The show brought in Hollywood director and producer David Fincher as well as actor Kevin Spacey. House of Cards received glowing critic reviews and a very warm welcome from Netflix customers.

Source: Netflix.

Following the success of the show, Netflix released a horror series called Hemlock Grove from director Eli Roth. More Netflix customers watched the new show in its first weekend than they did House of Cards. Keeping with the original content theme, next month the much-anticipated Arrested Development series will return to television via Netflix, and the company has already hired the Wachowski siblings (of The Matrix trilogy fame) to create a sci-fi series that will launch in 2014.

Despite its current success with the shows, Netflix's premium original content is still a gamble that original content will create additional subscribers. House of Cards cost $100 million to create two seasons and Hemlock Grove costs $4 million per episode. But, so far, the original content has become an asset, mainly because Netflix has been able to create shows people are interested in watching.

This points to a larger theme among television viewers: relevant on-demand content. The old cable and satellite model is slowly breaking down as more users find the content through online streaming services. Netflix not only has a first-mover advantage in this space but also benefits from the mounds of viewing data it gathers from its users. The company can, and is, using that information to create shows that it knows will draw in the most subscribers -- and keep current ones watching.

Why be wary
Netflix's stock is currently trading at 165 times 2013 earnings per share. That's not a typo -- it's really 165. Considering the average P/E ratio for the sector is about 14, the company's stock is valued extremely high. For comparison's sake, video-streaming competitor and online retail juggernaut Amazon.com (AMZN 3.66%) sells for 182 times earnings. Reuters pointed out the other day that this makes Netflix the fourth most pricey stock on the S&P 500 right now, on a valuation basis.

Besides its current stock valuation, the company faces significant competition in the video-streaming space. The most direct comparison right now would be Amazon's Prime streaming service. Similar to Netflix, users can sign up for Amazon Prime and watch TV shows and movies on demand. But Amazon also offers newer movie releases that can be purchased separately, something Netflix doesn't have.

Similar to Netflix, Amazon just released original content last week, albeit in the form of 14 pilot episodes rather than several full series. The pilots are available to subscribers and non-subscribers alike and Amazon asks everyone to vote for which shows they want the company to create a series for. If consumers respond positively to Amazon's original content, it could create serious competition for Netflix. 

Another major player is obviously Apple's (AAPL 4.08%) iTunes, which just turned 10 years old this week. iTunes posted $2.4 billion in revenue in the past quarter and offers movie and TV show rentals and purchases. While Apple's venue may not seem as current as Netflix's offering, iTunes takes up 67% of the TV show sale market and 65% of the movie sale market. If Apple were to expand iTunes into a more subscription-based model, it could certainly hurt Netflix's position.

The last concern, but certainly not least, is Coinstar's (OUTR) Redbox. The company recently launched Redbox Instant with Verizon, an online video monthly subscription service. Right now, Redbox only offers movies, which gives Netflix the upper hand. But Netflix investors shouldn't ignore this move into online streaming. If anything, they should be concerned that another company moved from a physical DVD company into an online streaming service -- just like Netflix has. Coinstar's Redbox isn't likely to take down Netflix anytime soon, but the fact that there is yet another online video-streaming option for consumers should worry investors at least a little.

Netflix investors should be happy with the company's current run, but the online-streaming world can change very quickly. Think of how fast music-streaming service Spotify became a major competitor to Pandora. The online video world is wide open, and Netflix will need to continue to build its original content successfully, broker great deals with other content creators, and manage the business well in order to stay on top.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$149.64 (4.08%) $5.86
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$195.19 (1.98%) $3.79
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Coinstar, LLC Stock Quote
Coinstar, LLC
OUTR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.