The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 6, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment...and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn...and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Netflix
Los Gatos, Calif.
$10.83
52 week low-high: $8.91-$38.62
$600 million market cap
By Rick Aristotle Munarriz (TMF Edible)
Would you rather buy a fast-growing company while it's out of favor or a cyclical behemoth just as it's peaking? Because no matter what Bill Mann says about PetroKazakhstan, I still see an oil exploration company that has a history of swinging in and out of fiscal fancy, including a bankruptcy filing six years ago. You have geopolitical risk -- all over really -- when you're buying into a company toiling away in Kazakhstan yet being run out of an office in Alberta, Canada, with dreams of tapping into China.
Yet while most of you may not be able to spot Kazakhstan on a map -- or even on a Risk game board -- odds are that if I whipped out a red DVD mailer, you would immediately recognize it as the handiwork of Netflix.
Netflix is a domestic company that is easy to understand. It has 3 million members and is well on its way to 4 million by year's end. For just $17.99 a month, you can have any three DVDs out for as long as you like. Done with a disc? Drop it off in your mailbox. Netflix covers postage both ways, and with more than two dozen national distribution centers, your next requested title will be delivered quickly.
If you like PetroKazakhstan because you think oil prices are only going to get higher, man, you'll love Netflix. If prices at the pump keep climbing, no one is going to want to make two trips to a video rental store to check out and return a flick. Go Netflix!
With four times as many online subscribers as Blockbuster
With more than a third of its stock price backed by a cash-rich balance sheet and the rest covered by a company that will grow revenue by at least 40% this year while turning a profit over the final nine months of the year, you shouldn't need a map to find the stock with the best potential for capital appreciation. Though Kazakhstan is a former Soviet republic, the only red that investors should be seeing at this point should come from the welcome Netflix mailers.
Fool contributor Rick Munarriz has been a Netflix investor -- and subscriber -- since 2002. He does not own shares in any of the other companies mentioned in this tournament match.
PetroKazakhstan
Calgary, Canada
$38.80
52-week low-high: $24.79-$46.92
$2.96 billion market cap
By Bill Mann (TMF Otter)
Do you hear that sound? The rumbling? The bloodthirsty ululations? Oh, yeah. There's going to be an invasion. The horde is coming.
No, not the Mongol horde. We're not talking about marauders riding across the steppe on horseback. We're talking about the triple threat facing Netflix as it faces down Wal-Mart
But there's something more. I believe that you should never invest in a company that profits most when its customers use it least. That's where Netflix finds itself. Think about it: Netflix has fixed revenue per customer and variable costs, based on how much the customer uses the service. If a customer manages 15 movie round-trips in a month, Netflix loses badly. Which means that the company's best interest is in attracting subscribers who use it less -- who also happen to be the same type of subscribers who would value the service least, and would fail to renew, giving Netflix that massive customer churn that is so costly.
I'll be honest: Even with my own past displeasure with the company's service, I still find myself impressed with what Netflix has achieved. It's the Google
Ah, you say (and I can imagine my opponent saying), but isn't your company, an oil services driller in Kazakhstan, an even higher risk? We're not talking about the difference between a rave and a church bake sale, after all. Investing in Kazakhstan does have its challenges, which can be best demonstrated by PetroKazakhstan's predecessor company filing bankruptcy in the late 1990s. But while the company was in receivership, now-CEO Bernard Isautier saw so much promise in the Canadian (yes, Canadian, though I understand they have a steppe there as well) company's Kazakh properties that he talked himself into the job, for no salary and a healthy slug of stock options. This gamble has paid off in a big way. What he saw was a country with improving business and political conditions, a place where he could do business.
And he has. Now companies like Coca-Cola
Ask not for whom the horde rides -- it's sure as heck not invading Kazakhstan.
Bill Mann owns shares in Petrokazakhstan.
Rebuttals
Netflix competition? Wal-Mart has been at it for two years, yet Netflix has 60 times more subscribers. For every Blockbuster online subscriber, Netflix has four willing to pay more. Amazon? The way it has overpriced its service in the United Kingdom, I'm not worried. Besides, churn is at a historic low. Netflix customers have never been happier! Oil prices may rise or fall, but the DVD rental convenience of Netflix is on an upward trajectory. -- R.M.
Rick points to the geopolitical risk inherent in investing in a company in the former Soviet Union. This is true; there is plenty of risk. But I was unaware that Kazakhstan had recently moved to Central Asia -- I thought it had been there all along. When enumerating risks, it's best to call upon ones that are not already priced in. For example, the way Netflix counts churn internally is, in my view, deceptive. It counts existing accounts and trial accounts that fail to convert the same when calculating its number. This dramatically overstates the importance of the trial subscribers, while undervaluing people with a history of making monthly expenditures at Netflix. It's a fine little company, but substantially overvalued at more than $110 per existing subscriber. That's way too high to provide any safety margin. -- B.M.
Who won? Cast your vote here.
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