Netflix (NASDAQ: NFLX) has become synonymous with how we watch movies at home. The Netflix business model of delivering movie content to users via mail, and now also via streaming Internet, has literally revolutionized the way we watch movies.

In fact, the emergence of Netflix as a wildly popular content conduit for movies has nearly put one time sector dominator and home-video giant Blockbuster PINK: BLOKA) on the verge of Chapter 11 bankruptcy.

When we look at Netflix stock, it’s easy to see why this company is so hot.  Over the past three months, NFLX shares are up nearly +15%.

Year to date, NFLX stock is up an incredible +123%.  That’s some serious viewing pleasure for shareholders, but the real pay off is that over the past five years Netflix stock has delivered a +475% gain.

So, can Netflix continue growing their share price—and their business—the same way they have in the next one to five years? Here’s a look at both sides of the argument.

Reasons to Buy Netflix Stock

Expansion plans.  Netflix has never been a company that settles for the status quo.  After gaining a foothold into the movie delivery business via standard mail, they moved into online content delivery. Still, there are many other markets to conquer, and one is our closest international neighbor, Canada. In July, the company announced it will expand into Canada beginning this fall. There’s also an iPhone app to stream content on the go. And in early August, NFLX inked a deal with Paramount, Lionsgate and MGM to add some newer movies to its online catalog.

Massive and growing customer base.  The company has created a remarkable DVD rental franchise with some 20 million subscribers paying a monthly fee of about $12 to both borrow physical DVDs and download streaming versions of select films and TV shows. Industry analysts think this is actually just the beginning for Netflix.  Some estimates call for the company’s subscriber totals to double to 40 million within a few years.  That kind of growth certainly could keep the throttle pinned on NFLX shares.

Major momentum.  If we look at the chart here of NFLX shares, we see almost unbridled upward momentum in the shares.  Over the past 52 weeks, each time the stock has dipped below its short-term, 50-day moving average it has made a marked run higher.  That shows real buying momentum, and in a tough and volatile general market environment, money is likely to continue flowing to where momentum is strongest.

Of course, on Wall Street, nearly every pro can be countered by an equally compelling con.  In fact, some of the virtues of a stock can also be considered a vice.  Let’s look at a couple of the arguments against Netflix here before we assess both sides.

Reasons to Sell Netflix Stock

Overbought shares.  Critics of Netflix’s continued move higher are quick to point out that the stock has just moved too far too fast, and can now be considered overbought.  Certainly, a +120% gain in just eight months is huge, especially when compared to a general market that’s down about -5% year to date.  But does the run higher in NFLX in 2010 mean the stock’s run is due to be over?  Critics say yes, since the growth curve just isn’t sustainable and rapid subscriber growth has to plateau eventually.

Increased competition.  As with any supremely successful business/idea, you are bound to get a stiff dose of competition.  The latest challenge to Netflix’s market dominance comes from Redbox, a division of automated retail provider

Coinstar (NASDAQ: CSTR). The Redbox retail kiosks offer DVD movie rentals for just $1 a day.  These are first-run movies that often, Netflix does not have yet.  Redbox also announced plans to launch an online streaming service aimed at Netflix’s market dominance.  Netflix also faces competition from search engine-giant Google Inc. (NASDAQ: GOOG).  The company recently announced plans to launch a paid-for on-demand movie service on YouTube. According to reports, the service is expected to go live before the end of the year, and will be similar to Netflix’s streaming services.

Insider Selling. Chief executive Reed Hastings is reaping the rewards of his labor, and has typically been selling 5,000 or 10,000 shares of company stock every week for seven years, the New York Post reports. With shares on fire this year, Hastings has received $31 million from the sales so far. But while some say this trickle is just a way to pad his paycheck, a deeper look at insider sales shows far more than a share here and a share there. The August tally of insider shares sold is close to 200,000 – with over 1 million NFLX shares sold in the last 6 months by insiders. Total shares held by officers, directors and others is about 7 million; a big stake for company leadership to be unloading.

The Verdict on NFLX Stock

To be certain, Netflix stock has had a tremendous run that in all likelihood won’t continue at the pace it has in 2010.  Still, the notion that the company is way too overbought doesn’t hold water.  The shares continue showing tremendous strength, as does the phenomenal growth of its customer base.

Yes, the company is facing competition from Redbox and Google, but these competitors have yet to make any kind of dent in Netflix’s market dominance.  If the competition does start to eat away at Netflix’s market share, then perhaps that will be a warning sign that investors should get out of this stock.  Until then, however, we should get continued viewing pleasure from this entertainment stock.

The verdict, therefore, is in favor of the pros.

As of this writing, Jim Woods did not own a position in any of the stocks named here.

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