Netflix: Strong start to 2012 and more to come
The stock has usually traded on subscriber growth and we expect international expansion to generate positive news flow this year.
Netflix primarily competes with streaming services such as those by Amazon Amazon (AMZN) and Dish Network's (DISH) Blockbuster, as well as DVD rental companies such as Redbox.
Recently Netflix released data showing that the company streamed more than 2 billion hours of TV shows and movies to its customers in Q4 2011. This implied that about one-fifth of U.S. households are watching at least 1 hour of Netflix's programming every day -- which is not bad (see Netflix Streaming to 20% of US Households an Hour a Day). Furthermore, an analyst from Piper Jaffray floated the idea of Yahoo buying Netflix. These events gave Netflix stock some momentum last Wednesday, which continued Friday as well.
On Jan. 9, Netflix launched its U.K. streaming service at a price of £5.99 per month, as expected. While we have a sanguine view of the company's prospects in the U.K., many naysayers think that competition will eat up any profits in these markets.
Separately, rumors of a potential acquisition of Netflix have been floating around recently due to the company's suppressed market valuation. However, the stock has usually traded on subscriber growth and given the international expansion, we expect this to add some positive news flow in 2012. Given the potential triggers to move the stock higher, Netflix is unlikely to agree to any bids around the current market valuation.
While Netflix's share price rose, more competition has developed. Comcast (CMCSA) and Disney (DIS) entered a long-term agreement under which Comcast's customers will be able to stream real-time programming from Disney's broadcast and cable networks to their PCs, smartphones and tablets. However, this is not direct competition as Netflix still primarily relies on older TV shows and also has added movies to its content library.
Our price estimate for Netflix stands at $126, implying a premium of more than 45% to the market price.
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