Netflix (NASDAQ:NFLX) shares have bounced between $300 and $490 over the past year, a 63% spread, and currently sit just above the middle of that 63% trading range. The digital-video pioneer is poised for a massive global expansion effort, but it's also saddled with big liabilities.
This polarizing stock has nearly quadrupled over the past three years, but it's also among the most heavily shorted tickers in the media sector. Is this a good time to add some Netflix to your investment portfolio, or should you side with the Netflix bears and skeptics?
Here's what you need to know about Netflix before you pick a side.
Netflix launched its first non-U.S. market in 2010, adding streaming services in Canada. Since then, the company has covered about 50 international markets across the Americas, the Caribbean, and Western Europe.
Each new market begin its runs at a loss. Operating profits come later, when the new territory has reached a critical mass of paying subscribers. Today, Netflix claims that its operations in Canada, Latin America, the British Isles, the Nordics, and the Netherlands are profitable as a whole. The latest European market additions "went well" but have yet to turn a profit.
Later this month, Netflix will add Australia and New Zealand to its service footprint, and Japan will join the party in the fall. That's not a complete list of planned market expansions in 2015, but Netflix is keeping its global plan close to the vest.
However, Netflix management expects to reach every corner of the globe by the end of 2016, giving the company less than two years to hit nearly 150 additional nations. This rapid expansion is powered by domestic and overseas operating profits, keeping Netflix mildly profitable overall during the expansion process.
Netflix is also raising a significant amount of debt, but that extra cash is not earmarked for market expansions. Instead, management plans to funnel these borrowed funds into producing original content.
For now, Netflix remains a pure content distributor and not a producer. Therefore, the company relies on other companies to script, shoot, and finish up all of its original shows. The "Netflix Original" moniker simply points to movies and shows you can't access anywhere else.
Let me give you a few examples. Political drama House of Cards, starring Kevin Spacey and Robin Wright, was pitched to several cable networks by indie production house Media Rights Capital. Netflix outbid them all and offered a unique launch model, including a firm two-season order. Each new season is published as a complete 13-episode batch, leaving viewers with no weekly waits between the new episodes.
That is, in fact, Netflix's preferred publishing schedule. Lionsgate (NYSE:LGF-A) production Orange Is the New Black follows the same format, as does Comcast (NASDAQ:CMCSA) studio Universal Television's Unbreakable Kimmy Schmidt. Fans celebrate this binge-friendly model, while critics wonder whether the all-at-once launches can sustain audience interest the way a traditional week-by-week launch does.
Netflix isn't completely married to the binge-viewing idea, though. Dreamworks Animation (NASDAQ:DWA) is sending over smaller batches of five new episodes each for its animated series Turbo F.A.S.T., The Adventures of Puss in Boots, and All Hail King Julien.
Still, the majority of Netflix's originals do come in season-sized launches. This is a new business model in the media industry. The jury is still out on whether Netflix has found a gold mine for its production partners or wasted resources on a bad idea. The fact that Netflix continues to premiere entire seasons at once points to a certain level of success, but again, the company isn't sharing any hard data.
So far, Netflix has launched 12 entirely original series, several continuations of canceled network shows, and a plethora of single-show specials. These will be joined by at least 18 new series in 2015 and another 20 or so in 2016, which is why Netflix is taking out big loans to finance this very large production effort.
I wouldn't be surprised if the company built its own production facilities in time, but management has yet to discuss any completely in-house productions.
Netflix may have broken new ground when it introduced a streaming movie service in 2007, but times have changed.
Today, the service rubs shoulders with Amazon Prime by Amazon.com (NASDAQ:AMZN) and managed-by-committee service Hulu Plus. According to a recent report from Nielsen (NYSE:NLSN), about 36% of all American TV households subscribe to Netflix today, while 13% take the Amazon service and 6.5% are paying for Hulu. There is plenty of overlap between these cohorts -- 40% of households subscribe to one or more of these services. In other words, just 4% of the market uses a rival service without paying for Netflix as well.
Still, many investors worry about Amazon Prime and Hulu Plus stealing Netflix's thunder somewhere down the road. Both services have followed Netflix into the original productions market, with some success. As for international ambitions, Hulu also runs a service in Japan and Amazon Prime is available in a handful of overseas markets.
Moreover, every traditional broadcaster worth its salt is sniffing around this new digital market as we speak. Time Warner (NYSE:TWX.DL) powerhouse HBO has finally gotten around to launching a streaming service that doesn't require an expensive cable TV package. CBS (NYSE:CBS) has one streaming solution for its namesake broadcast network and another one for premium movie channel Showtime.
So the competitive landscape is changing fast. Netflix remains a leader today and has beaten back several challengers in the past, but that doesn't make the company immune to new competition.
Netflix CEO Reed Hastings certainly takes Amazon Prime and Hulu Plus very seriously, and has all sorts of respect for what HBO is doing. Investors must also keep a close eye on what these rivals are doing. But for now, all of these contenders are distant threats at best.
Reed Hastings takes a delightfully long-term view of his business.
For instance, Hastings hopes to reach one-third of the households in each new market within seven years of the initial launch. When the current expansion plan ends in two years, the company plans to start raising profit margins. Netflix likes to renew production contracts before the latest available season actually becomes available to viewers, no strings attached. Management has even published an official long-term view, which is a living document that gets updated a couple of times per year.
All of these things are almost unthinkably forward-minded in a industry that often cancels shows after just a handful of weak ratings.
I have confidence that the management team at Netflix knows what they are doing, and that markets risks are appropriately balanced out by reasonable caution and decent margins of error. Short-sellers disagree with that point of view, and generally expect the business to come crashing down like a house of cards at the first wrong turn.
Keep an eye on how Netflix handles these details -- overseas expansion, exclusive content production, rising competition, and playing to win in the long run -- and you'll get a good handle on what the stock might be worth.
From my point of view, it's hard to find a stronger growth stock for the long term than Netflix, given the outsized business prospects and manageable risks.