Is Netflix Finally Too Cheap to Ignore?


The market's chilly reception of Netflix (NAS: NFLX) may be overdone. Bank of America/Merrill Lynch analyst Nat Schindler upgraded shares of the video service -- from underperform to buy -- this morning.

It's not that Schindler woke up to the company's improving fundamentals. His price target of $72 isn't budging. When the stock was trading higher than that earlier this summer, he was rightfully bearish. Now that the stock has fallen considerably short of that mark after last month's disappointing quarterly report, the path to $72 is higher rather than lower.

Schindler is still encouraged by the company's strengthening domestic streaming business. DVD-based customers are bailing on the company, but the streaming service is as popular as ever.

All but 2.5 million of Netflix's 30.1 million subscribers are streaming these days. For the first time ever, more than two-thirds of Netflix's customers are exclusively streaming.

Was there more growth to be milked out of optical discs? Sure. Coinstar's (NAS: CSTR) Redbox continues to grow in physical rentals and even successfully rolled out a 20% rate increase on DVDs late last year. However, Netflix's emphasis on streaming -- despite the lower monthly price points, weaker contribution profits, and losses incurred in international expansion -- is giving the company a scalable advantage that few will be able to catch up to before long.

Right now, Netflix has more domestic subscribers than any single cable- or satellite-TV provider. The gap is growing. Even market darling DirecTV (NYS: DTV) suffered 52,000 net cancellations this past quarter. It's the first time in years that DirecTV has suffered a sequential drop in subscribers.

Consumers are changing the way they interact with their TVs and how much they're willing to pay for video entertainment. Netflix is leading the way on that front. This may not be as lucrative a business as it once had -- for now -- but the company would rather be early than late to the undeniable trend toward digital video on demand.

It was easy to hate on Netflix last summer, when the stock was overvalued and the company misunderstood the consumer. The tide is turning, and it may have been consumers all along who misunderstood where the future of TV was heading.

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Originally published