Netflix Shares — 3 Pros, 3 Cons

It's hard to expect upside on a $300 stock

   
Netflix Shares — 3 Pros, 3 Cons

Netflix (Nasdaq:NFLX) has been a horrible nightmare for short-sellers. The company always seems to find ways to grow and produce cash flows.

The latest savvy move came on Tuesday with the company jacking up its prices. Customers will no longer be able to bundle DVD delivery and streaming services. Now, if you want both, the price will be 60% higher.

There has been an uproar from some customers, especially on Twitter and Facebook. But it’s not bothering Wall Street. In Wednesday’s trading, Netflix’s shares are up 2.7%.

But after a 70% runup this year alone to $300, is the stock still a good investment? Or are things a bit frothy? Let’s take a look at the pros and cons:

Pros

Entertainment hub. In the first quarter, Netflix reached 23.6 million subscribers. No doubt, this is a juicy source of recurring cash flows. But it also shows that Netflix knows how to continue to provide strong value, such as with a broader selection of television shows and movies. The company also has a sophisticated system that analyzes customer behavior — providing relevant recommendations.

Global markets. This is a big focus of Netlix and is a key to future growth, especially as the U.S. market gets saturated. So far, the company is getting lots of traction in Canada — in about seven months, Netflix attracted more than 800,000 subscribers there.

Facebook. Netflix CEO Reed Hastings, recently joined the social network’s board. Might there be some type of partnership? Perhaps. With 750 million active users, Facebook is becoming a huge power and appears to be moving aggressively into entertainment.

Cons

Content costs. Netflix has been aggressive in striking deals with networks and movie studios. In fact, the company is the only premium online provider that has content from all four broadcast networks. However, these licensing deals are incredibly complex and expensive, involving large upfront payments.

Competition. Some of the rivals include large operators like Hulu, Apple (Nasdaq:AAPL), Amazon.com (Nasdaq:AMZN) and Coinstar (Nasdaq:CSTR). There is also Dish Networks (Nasdaq:DISH), which recently purchased Blockbuster Video.

Thus, with higher prices from Netflix, there may be an incentive for customers to move over to alternatives.

Valuation. Netflix’s shares are not cheap. They currently trade at a price-to-earnings ratio of 87.

Verdict

Wall Street analysts love Netflix. On Tuesday, Goldman’s Ingrid Chung bumped her price target to $300 to $330, and she sees an acceleration in earnings.

Yet even for a company like Netflix, it can be tough to keep up the torrid growth. The economy is showing signs of sluggishness and competition is heating up. And with the steep valuation, the risks are not inconsiderable. For investors, the cons outweigh the pros.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2011/07/netflix-shares-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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