Netflix and the 'Network Effect': It's Now Too Big to Beat

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As well as things have been going for Netflix (NFLX) these past two years, its stockholders appear to have even better times to look forward to. Shares of the leading premium video streaming service hit yet another all-time high on Tuesday after RBC Capital Markets analyst Mark Mahaney bumped his price target on the stock from $530 to $600.

Mahaney was already bullish on Netflix, but his new price target finds him perched at the high end of the 30 major Wall Street pros tracking the dot-com darling. Netflix shares may seem expensive gauged against conventional measuring sticks, but there is also a healthy amount of short interest activity that Mahaney feels will keep any frothy enthusiasm in check.

More important -- at least, based on Mahaney's comments in his bullish note -- it seems as if it will be hard for anybody else to catch up to Netflix.

"We continue to believe that Netflix has achieved a level of sustainable scale, growth and profitability that isn't currently factored into its stock price," he writes.

The Rich Get Richer

Streaming will never be a "one size fits all" business. There are too many content creators out there, and it won't just be Netflix inking exclusive licensing deals. If you want to stream "Downton Abbey," "The Sopranos" or "SpongeBob SquarePants," you're going to need a Prime account at (AMZN). If you're hungry for "Game of Thrones," you'll need to have an existing cable or satellite television subscription with Time Warner's (TWX) HBO tacked on as a premium channel to stream HBO Go.

There could be many winners here as even more of our video consumption goes digital and on-demand. However, it's highly unlikely that anyone other than Netflix will be leading the way. That became painfully apparent earlier this month when Time Warner -- Netflix's most vocal rival -- struck a licensing deal to hand worldwide streaming rights for its new series, "Gotham," to Netflix. The show detailing the early professional lives of Batman and Commissioner Gordon debuts on Fox later this month, but after the first season has aired, it will be made available in its entirety to Netflix subscribers worldwide.

There are a lot of potential viewers. Netflix topped 50 million customers at the end of June, and that figure is expected to close in on 54 million by the end of this month. If you're a content creator -- and that certainly fits the bill at Time Warner across its many media properties -- you can't afford to make Netflix your enemy. Studios have sought out Netflix as a distribution outlet, and they're continue to do so. Netflix can pay better than anybody else for streaming rights given its unmatched membership base, but it's also important for movie makers and producers of TV shows to have their products showcased in front of the widest possible audience. That stirs demand for more seasons, sequels or franchise reboots.

Stream On

Netflix is now topping $1 billion in quarterly revenue. It has $7.7 billion lined up in future streaming content obligations. Even though it recently raised its monthly rate for new subscribers from $7.99 a month to $8.99 a month, it's apparently not having any problem attracting more users.

In short, Netflix has become a perfect example of the network effect: It's the place to be for viewers because that's where the content can be found, and it's the place to be for content creators because it's where the viewers can be found.

It doesn't seem likely that anyone else is going to be as successful in offering up a growing smorgasbord of digital content at a reasonably low price. Mahaney's $600 price target may be ambitious, but fundamentally speaking, Netflix keeps moving in the right direction and padding its lead over any potential competitor.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of and Netflix. Try any of our newsletter services free for 30 days. Check out our free report on high-yielding dividend stocks.
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