Netflix is starring in its own movie

A startling turnaround, led by original productions, has the stock on a tear and appealing to investors with a high tolerance for risk.

By Jonathan Berr Apr 24, 2013 9:36AM
Thanks to some pricing and marketing miscues, Netflix (NFLX) was in freefall in 2011 and 2012, hemorrhaging customers and profits. A Motley Fool writer even declared the company would "never be great again," and CEO Reed Hastings' job appeared to be in jeopardy.
Then, a funny thing happened. The Los Gatos, Calif., company learned from its mistakes. It figured out that customers wanted online streaming but didn’t like the way Netflix was selling it to them.

More important, Netflix decided the best way to win back disaffected customers was to offer them something they couldn't get anywhere else. So, it signed deals with studios and decided to get into the TV production business with the drama "House of Cards," and it resurrected the beloved cult comedy "Arrested Development."

The results have been nothing short of spectacular.

Netflix added 2 million U.S. subscribers in the quarter for a total of 29.2 million, surpassing Time Warner's (TWX) HBO channel. Netflix expects to top 30 million in the current quarter and plans to eventually reach 90 million. According to data cited by business news site Quartz, during peak Internet usage time in the U.S., Netflix accounts for 33% of all downstream traffic, an incredible figure. 

The stock has skyrocketed since Monday, when the company reported results that were better than even the most optimistic of earnings projections. Plus, it gave bullish guidance.

Unfortunately, the shares, which have surged more than 134% this year and are the top performer in the S&P 500, are extremely expensive, with a price-to-earnings multiple topping 521. The average 52-week price target on the stock, as if it matters is $149.86, more than $62 less than where it recently traded.

What could slow Netflix? Some users are allowing their friends and relatives to "share" their accounts, a practice that analysts expect the company to start policing more closely. Wedbush Securities analyst Michael Pachter told Bloomberg that the service has as many as 10 million freeloaders. This problem, though, is solvable through either creative marketing or technology.

For investors with an appetite for large risk, though, Netflix is worth a chance. The company is on the cutting edge of where the entertainment is headed in the coming years. And as noted, Hastings has already proven the naysayers wrong once.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.


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19Comments
Apr 24, 2013 12:20PM
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What th......MSN was defecating all over Netflix just a few weeks ago....now it's the greatest thing since sliced bread.

 

Well, MSN, join the rest of us Netflix subscribers, who knew a good thing when we saw it all along.

Apr 24, 2013 12:33PM
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I think Netflix has made a great move by showing "house of Cards" and other series that keep you the entertained for hours and it keeps you wanting more. So keep these little mini series coming because I have not been watching cable tv lately. Wondering what Comcast is going to do to keep it's customers. 

Apr 24, 2013 12:40PM
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While Netflix is good, it sure as heck isn't great. Half the movies you want to see aren't offered via Netflix. No Pulp Fiction? No Titanic? No Inception? These movies came out awhile ago. Why aren't they being offered? You need to reach out to more studios!!
Apr 24, 2013 12:31PM
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Their service still beats most.  Good price for what they offer.  I ditch the TV services and have had Netflix on both their DVD and streaming.  I love it and so does my family.  I'm definitely signing up for the family streaming service of $11.99 for 4 users at once.
Apr 24, 2013 12:44PM
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We only use Netflix.  Too bad they don't add new releases very often.  We supplement with Vudu and DVD purchase.

Apr 24, 2013 12:14PM
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I'd cancel cable if I could stream the Showtime series Homeland and Californication any other way...
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Dump the cable, plenty of great viewing on the internet (Netflix and Amazon Prime).
Apr 24, 2013 1:08PM
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Between HBOGO, Netflix, Hulu plus, and amazon prime you should be able to get your content fill. Just get together with family or friends and share passwords so you can spread the cost around.
Apr 24, 2013 1:30PM
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when people begin to pay for Internet bandwidth usage by the GB (not unlimited), Netflix services won't be such a great value. 
Apr 24, 2013 1:06PM
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While Netflix is growing their movie and show library all the time they tend to add lots of crap movies no one wants to see. Dont say you are increasing value when you add content people dont want. I understand that they face a battle with the content holders but there must be some way to get decent movies from 2010, 2011, or 2012. I am a netflix user but I cancel and rejoin often depending on what they recently got
Apr 24, 2013 2:36PM
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Many TV viewers are simply fed up with network TV. I know I am. All those repeats in mid-season are just disgusting. I don't want to see repeats of shows I just watched a coupe of weeks ago. I also hate those 'hiatuses'. What's that all about? I've just about decided I'm going to give up watching the shows as they're being broadcast and pick them up later when they come to Hulu, Netflix, Amazon or whatever other alternative source might carry them.

I really miss the 'good ole days' when the seasons began in September and ran straight through to April or May with disruptions only for 'specials' around the Christmas season. That's the only way to go! The networks better figure it out soon or they could being to see their demise!

Second complaint about the idiots running 'the networks', too. Why do they think the only people they have to cater to are between the ages of 18 & 49? Got news for 'em, THE REST OF US COUNT TOO! CBS is probably the best example of this warped thinking. The show Harry's Law with Cathy Bates was their most watched scripted drama but it was cancelled because their 'chosen 18-49 demographic wasn't watching. And now they've withdrawn their support from the Jesse Stone movies with Tom Selleck for the same reason. To me that's just plain disloyal since Tom is under contract to the for Blue Bloods!

Apr 24, 2013 2:16PM
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It's quite obvious why Netflix stock became the favorite punching bag of economic pundits at mainstream media outlets. They are all owned by conglomerates that hold cable/broadcaster provider services, the biggest competition for Netflix. 
Apr 24, 2013 1:47PM
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Got me once -shame on you.

Not going back for a shame on me.

Only a matter of time ,Netflix will return to their old tricks.

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