8 Reasons to Believe in Netflix
It's no fun shoveling dirt on Netflix's (NAS: NFLX) grave, but that's pretty much what the market's been doing lately.
Even CEO Reed Hastings' decision to undo the unpopular Qwikster migration was met with short-lived approval. The stock closed 5% lower on the news Monday.
I've been a very critical shareholder of the company in recent weeks, and rightfully so. Netflix has turned one of the great Internet brands into the butt of SNL jokes in the blink of an eye. However, things aren't as bad as the beating may suggest. Let's go over a few of the reasons to believe that Netflix will bounce back.
1. Complainers aren't as stupid as they seem
One of the funniest arguments that I've read from folks venting on Netflix's blog is that they are going to switch to Coinstar's (NAS: CSTR) Redbox because of the price increase. I see it a lot. Do these people realize that Redbox doesn't have a streaming service? Removing streaming from the equation, do these same people realize that Netflix's unlimited DVD plans actually became $2 a month cheaper last month?
They'll come around. They can't be as dumb as their rants suggest.
2. Streaming smorgasbord alternatives aren't all that great
If web-savvy video buffs aren't happy with Netflix's streaming selection, just wait until they get a load of the alternatives. There aren't too many buffets out there. Amazon.com (NAS: AMZN) offers only a fraction of Netflix's titles -- and it's the bad fraction. Time Warner's (NYS: TWX) HBO Go is limited to HBO shows, and it's only available to those paying for the premium movie channel on top of a costly cable or satellite subscription. Dish Network (NAS: DISH) rolled out a new movie streaming service this month, but it's more expensive than Netflix and it's only available to Dish satellite television subscribers.
3. Common reporting errors are overstating the gravity of the situation
I have seen several reports claiming that Netflix will lose a million domestic subscribers in the third quarter. It's certainly possible, but let's get to the root of the misrepresentation. Netflix closed out the second quarter with 24.6 million stateside accounts, issuing guidance for 25 million subscribers by the end of the third quarter. When the company lowered its guidance to 24 million in mid-September, some careless reporters have used 25 million as the starting line for Q3 instead of 24.6 million.
I'm not naive. Churn probably got even worse during the latter half of September. However, Netflix's official guidance only indicates 600,000 fewer members -- and those that are sticking around will be more profitable to Netflix.
4. Everyone's forgetting about Netflix as a digital exporter
Let's not forget that Netflix already had a million Canadian streaming customers by the end of June. Netflix rolled out in 43 countries through Latin America and the Caribbean last month. Growth has been decelerating in Canada since its launch, but it remains a positive number. Netflix's southern expansion will obviously be incremental, even if it's just a few weeks of activity.
My point here is that Netflix isn't just a stateside story anymore, regardless of the negative reports in recent weeks.
5. Only two companies can deliver overnight rentals for less than the cost of a postage stamp
When it comes to optical discs, only Blockbuster and Netflix have the regional distribution centers to provide overnight deliveries -- and two-day turnaround times -- for DVD and Bluy-ray discs.
Blockbuster is the only legitimate competitor when it comes to the mail-based deliveries that 14.2 million of Netflix's 24 million stateside accounts pay for, and it's hard to imagine Blockbuster parent Dish having more focus than Netflix to make sure it gets this right.
6. Netflix is light years ahead of everybody else in digital distribution
Several new Blu-ray players come with red Netflix buttons on their remote controllers. Can you imagine anyone else landing that kind of real estate? Netflix streaming is a key feature of all three video game consoles, TiVo (NAS: TIVO) , and most Blu-ray players and smart TV boxes.
Even with just 24 million subscribers -- and 21.8 million of them paying to stream -- no one even comes close, making Netflix the company with the most money to spend -- and studios bypassing streaming on Netflix with the most to lose -- in this growing niche.
7. It's cheap, dude
Netflix is now trading for less than 18 times next year's projected earnings.
8. You can teach Netflix new tricks
It took just three weeks for Netflix to kill Qwikster, brandishing the humility and flexibility that has made the company a winner over the years. What will it have to do to keep growing at this point? Every shortcoming is an opportunity for a growth catalyst. Really.
- The streaming selection lacks new releases? Well, a month of Netflix is cheaper than two pay-per-view rentals. If there really is demand for fresher content, do you realize how easy it would be for Netflix to make piecemeal rentals available to its 21.8 million streaming customers? It has resisted for the sake of the smorgasbord, but it will concede the point to own this space if it wants to.
- The price hike was outlandish? Netflix lowered the price of its unlimited DVD plans. All it did was begin charging for streaming, something that millions of its subscribers were already paying for on a stand-alone basis. It's having 21.8 million customers paying $7.99 a month to stream that will deliver even more streaming content. Liberty Starz (NAS: LSTZA) is walking away because it wanted Netflix to charge more, creating tiered pricing plans. If studios feel that Netflix is devaluing digital content with its $7.99 buffet, imagine how they will feel about what Amazon is doing.
- Churn is getting out of whack? Netflix has always been a high-churn business. It's easy to cancel. It's easy to restart. Once those cancelling begin weighing the costly or incomplete alternatives, they'll be back.
Netflix is in better shape than you think.
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At the time this article was published Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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