Netflix (NASDAQ:NFLX) is making a move that many investors have been waiting for. Today, the DVD rental company (and Motley Fool Stock Advisor pick) said that it will increase its advertising efforts, appointing a new executive to spearhead the initiative. This news should be a big hit with Netflix investors.
Although some Fools disagreed on whether Netflix's recent plan to sell its used DVDs was a brilliant move (here are the pro and con arguments), most of us believe that Netflix has been missing many opportunities to expand its revenues -- especially the sale of choice advertising real estate on its signature red mailers. My colleague Rick Munarriz has been a longtime proponent of that particular idea. As more and more people join Netflix, its willingness to take advantage of opportunities that complement its popular service is key.
According to today's press announcement, Netflix will allow advertising on its DVD mailers, the pages of its Web site, and the emails it sends to subscribers. I particularly appreciated the announcement's mention of "relevant advertisers." Companies like Google (NASDAQ:GOOG) have proved that relevance is a key advertising driver. Unrelated advertising pollution on Netflix's materials probably won't sit well with subscribers, but entertainment-oriented companies might find an interested and open audience among Netflix junkies.
If done right, this new initiative could reap healthy profits for Netflix. However, today's stock appreciation may be jumping the gun. Although investor sentiment was pretty low this past spring, this chart shows Netflix shares' steady upward march in recent months. With a P/E of 65, Netflix is a gutsy company with a lot of momentum going for it, but it remains a speculative investment. That said, I'm sure most pro-Netflix investors would remind me that this is nothing new -- there were many times in the past where Netflix felt even more speculative.
Netflix is a Motley Fool Stock Advisor pick. To find out what other companies David and Tom Gardner have flagged as winners, please click here.
Alyce Lomax is a Netflix subscriber but holds no financial position in any companies mentioned. She loves discovering new films through the Netflix Friends option.
