Stream yourself some cash: Invest in Netflix

The company's philosophy of 'build it and they will come' seems to be working.

By TheStreet Staff Feb 5, 2013 3:06PM

Couple on sofa watching television together copyright Blend Images, Hill Street Studios, the Agency Collection, Getty ImagesBy Richard Saintvilusthestreet logo


For all the criticism that Netflix (NFLX) has taken, the company deserves plenty of credit for having turned things around.


Granted, Netflix shares are still far from the $300 level they reached in 2011. But I'm kicking myself for having missed the bottom at $52. And after watching the first few episodes of its original series "House of Cards," this weekend, there are signs that more gains are on the way.


Popular bear arguments against Netflix include its rising costs and the company's ill-timed price hike, which alienated subscribers and led to 1 million customer cancellations in the quarter following the hike. This allowed Amazon's (AMZN) Prime streaming service to gain notoriety.


More recently, however, a new Netflix has emerged. It has been one good decision after another, and these decisions have been bearing fruit as the company's fourth-quarter earnings report attests.


Ahead of the report, the Street was expecting a loss of 13 cents on $935 million in revenue. 

But Netflix stunned investors by reporting a profit of 13 cents a share on revenue of $945 million. In the year-earlier quarter, the company reported EPS of 64 cents.

As impressive as this was, the most noteworthy aspect was the company's incredible cost management, including a 12% decline in general administrative expenses.


Marketing expenses grew slightly, by 2.7%, and technology costs were up 1.7%. As noted, expenses have been a huge point of contention for bears, especially because profits dropped 90% in the third quarter due to heavy international expansion.


Plus with competition on its heels, Netflix has had to spend to maintain its lead. Besides, nobody seems to complain that Amazon posted a loss of $274 million in the same quarter. The good news, though, is that Netflix continues to grow subscribers at an impressive rate, adding more than 2 million domestic streaming subscribers plus 1.81 million international ones.


The company is growing subscribers while also improving margins -- across each reporting segment. This means that profitability will continue to improve despite the concerns about content costs. In that regard, Netflix may not have much to worry about for long -- not if the company continues to produce solid hits such as House of Cards

Also see: Amazon vs. Netflix


As I was watching, I had forgotten that I was on Netflix and not HBO or Showtime. In the long term, if Netflix is able to produce such original hits, this will benefit investors and lessen Netflix's dependency on outside content, many of which takes a meaningful chuck of its profits.


In other words, "House of Cards" just might have been the foundation for a mansion. And this has not gone unnoticed from rivals. For instance, Apple (AAPL), which has its own streaming ambitions, is reportedly in talks with HBO to bring HBOGo to Apple TV. But will this be enough?


The biggest game-changer for Apple would be to acquire Netflix -- especially now since Netflix has proven capable of delivering original material. For that matter, Netflix's library is already much bigger than what HBO can offer Apple. And it would only cost Apple 8% of its $137 billion in cash.


What's more, that Netflix just recently signed a content sharing deal with Disney (DIS) makes this a deal that Apple can't pass up -- not if it really cares about beating Google (GOOG) in tech and in television. Plus, the lure of Disney offers Apple extra leverage to grow its iTunes business as it will allow subscribers to also stream movies from Disney subsidiaries such as Pixar and Marvel. 

In the meantime, investors have to be impressed with this new Netflix and this incredible growth. Though Netflix has been criticized for its "grow at all cost mentality", the company has instead believed "if we build it, they will come." Although many didn't believe in Netflix's infrastructure builds, but this has worked perfectly. Today it's a "House of Cards." In time, investors might be in mansions.


At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.



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Feb 5, 2013 3:33PM

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