Why Ride the Netflix Rollercoaster?


The 11% jump in stock price Netflix (NAS: NFLX) shareholders are enjoying in August is a confirmation of sorts for diehard fans: "See, Netflix has potential!" But looking back a mere two weeks to mid-July, we find the aforementioned 20% appreciation came after the precipitous 35% drop (following the July 24 earnings call). The worst part? The wildly fluctuating share price isn't an anomaly; it's a microcosm of what Netflix owners deal with daily.

News driving share prices
got the Netflix rollercoaster started this week, announcing a content deal with NBC Universal and Paramount. The agreement adds to Amazon's already impressive array of streaming content found on its Prime Instant Video service. And Prime Instant Video is growing, big time. The recent deal comes on the heels of distribution agreements with Viacom and MGM and leaves Amazon with more than 18,000 videos ready for streaming. Netflix's stock price dropped nearly 1.5% on the news.

On Aug. 24, Netflix announced some news of its own. Netflix signed a distribution deal with The Weinstein Company that begins in January. You may recall that Weinstein produced The Artist and a few other indie-like flicks. Investors didn't seem too impressed with the new deal, with the stock dropping 1.5%, give or take. But you have to hand it to CEO Reed Hastings -- he certainly understands the necessity of content, always has. In fact, Netflix is on the hook for some $4 billion worth of streaming content over the next several years.

Netflix announced on Aug. 15 plans to expand into Denmark, Finland, Sweden, and Norway by the end of this year. Shareholders enjoyed another mini-pop shortly after the Nordic announcement, when we learned Netflix had enrolled a million customers in the United Kingdom. Aficionados of Netflix can still picture the stock-price jump from about $180 a share to more than $200 when the expansion across the pond was announced this past January.

International expansion sounds good on paper, but unfortunately it's not delivering results to the bottom line, and won't any time soon. Take Q2, for example -- Netflix lost a cool $89 million overseas, and that's likely to grow as it moves into Nordic territory. Proponents of the Netflix international growth strategy point out that you need to spend money to make money, and there's logic there. But when the growth is limited to the 13.2% margin streaming business versus the 46% margin DVD line, it's going to be a long time before expansion translates to growing profitability.

Why get on the Netflix ride?
Every time a competitor announces a content distribution agreement, expansion plans, or most anything else, Netflix stock tends to react. Who knows what'll happen if the much-discussed partnership between Verizon (NYS: VZ) and Redbox provider Coinstar (NAS: CSTR) actually amounts to something.

Whether the Verizon/Coinstar marriage comes off or not, there are more than enough competitors to keep the wild Netflix ride going. If anything, Comcast (NAS: CMCSA) and Time Warner (NYS: TWX) were slow to get in the game but are uniquely prepared to affect the market. Both have inroads to all-important content, substantial customer bases, and existing technologies to build upon.

The almost religious fervor surrounding growth in Netflix streaming membership -- no matter that it provides little if anything substantial to earnings because of those minuscule margins -- is a major cause of the Netflix rollercoaster. Each time new subscriber numbers are tossed around, the stock price moves. And Hastings has made it abundantly clear he's sticking with his streaming, growth-at-all-costs strategy -- no matter the consequences.

The result of Reed's love of all things streaming, and the growing competitive marketplace Netflix has found itself in? In August, Netflix stock prices ranged from a low of $53.87 to a high of $65.60. July, $57.01 a share up to $84.97. June saw more of the same: Netflix stock prices swung from $62.66 a share, to $69.83. That's a rollercoaster ride best avoided.

Amazon is already a serious competitor of Netflix in the streaming content business. Of course, that's only one of the areas of potential growth for the online behemoth. You can review both sides of the Amazon investment story -- the opportunities and risks -- in this premium report. To gain instant access to this report, which comes with a full year of analyst updates.

The article Why Ride the Netflix Rollercoaster? originally appeared on Fool.com.

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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