For the past few years, Netflix (NFLX), the undisputed king of streaming television, has been on an impressive tear. NFLX is up more than 90% year-to-date, and up almost 580% since the beginning of 2013. NFLX is the epitome of a tech investor’s perfect pick.
With nearly $3 billion in cash and investments, projected earnings growth of 23% per year, and shares trading just below their recent all-time high, Netflix continues to dominate the Internet TV arena, much to the dismay of traditional cable and satellite providers such as Comcast (CMCSA) and DirecTV (DTV).
At the company’s shareholder meeting on June 9, management received approval to increase the number of NFLX shares by way of a 7-for-1 stock split effective in July, which is intended to make Netflix stock more accessible to a wider range of investors.
Where Did the Bears Come From?
Considering the position Netflix holds in the industry, along with the recently-reached milestones management reported in April (60 million members streamed 10 billion hours of video in the first quarter), it’s surprising to discover that some analysts have described the coming NFLX stock split as a negative event.
It’s true that the 7-for-1 split won’t add any additional value to Netflix shares — each current share will be separated into seven new ones at 1/7 their value. However, with shares trading at close to $100, a greater number of investors will be able to participate in the company’s success.
JC Parets of Eagle Bay Capital described the coming stock split as “a negative for the market.” Last week, three analysts from Societe Generale downgraded Netflix stock from “buy” to “sell,” stating that NFLX is currently “priced for perfection,” implying that Netflix stock has reached its ceiling.
Further, infamous activist investor Carl Icahn completely bailed on Netflix stock following the announcement of the split. Icahn originally held a 9.4% stake in the company, but sold more than half of his NFLX shares in October 2013. Last week, he announced on Twitter that the last of his shares were finally sold.
Has Netflix Stock Reached Its Peak?
The quick answer: No. While Comcast is the world’s largest broadcasting and cable company — CMCSA has a market cap of $150 billion and serves 23 million television customers worldwide — Netflix has a market cap of only $40 billion and serves 60 million customers worldwide.
With the ever-increasing prices for cable and satellite television services, combined with their embarrassingly abhorrent customer satisfaction feedback, Netflix will continue to gain new customers. Repeated incidents of angry representatives changing customer bills to obscene names and derogatory insults, together with downright refusal to accommodate cancellation instructions, has only quickened the cord-cutting pace.
The way people watch television isn’t the same as it was years ago. Technology has made video-on-demand services possible for a fraction of the price charged by traditional cable companies. Plus, younger generations are used to freedom, flexibility and instant gratification — all of which are provided by NFLX.
Another area in which Netflix continues to excel is original content creation. Award-winning shows such as House of Cards and Orange Is the New Black illustrate Netflix’s production capabilities, making NFLX a legitimate competitor against longtime premium channels such as HBO. Netflix CEO Reed Hastings has been pushing to achieve his goal of “something new and fresh to watch every four weeks.”
Plus, if Netflix successfully completes its planned international expansion by the end of 2016, the total worldwide addressable market will undoubtedly push Netflix stock to new heights — even after the 7-for-1 split.
Bottom Line on Netflix Stock
Investors who bought shares of NFLX in the early days, back when it was just a mail-order DVD rental company, are enjoying returns of roughly 8,500%. Those who bought share of Netflix stock in 2008, when video streaming services first began, have seen returns above 2,000%.
Looking at the current market for on-demand video, considering the state of the industry, and examining the competition, there’s nothing preventing Netflix stock from continuing its run up. If you don’t already own shares, there’s no time like the present to pick some up.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.