One year ago today, you could buy a share of Netflix (NASDAQ:NFLX) for about $51. That didn’t seem like the cheapest deal – the stock had traded at around $30 a year before that.
The thought was, there was no way the stock would climb another 40% over the next year – traders who climbed aboard Netflix while it choked whatever life was left in Blockbuster would be the last to enjoy a significant move higher.
And who knows – maybe that instant-streaming thing they’d been spreading around will take off enough to earn shareholders a few more bucks.
What a difference a year makes.
Netflix said Wednesday that it now has more than 20 million subscribers, all of them paying at least $8 a month for the company’s ubiquitous instant-streaming rentals and DVD disc rentals. Its latest-quarter profit hit $47.1 million, revenue came in at $596 million, respective jumps of 52% and 45% year-on-year.
Heading into Thursday’s closing bell, the stock was up 15% to $210.
But its success can’t possibly continue though, right? Eventually, Netflix will feel the sting of its content providers abandoning ship, claiming their offerings are undervalued by Netflix’s all-access, low-cost streaming service. Subscribers now taking advantage of one-month free trials won’t become paying customers, revenue will dip, and discerning investors will sell big and remember the time Netflix was an entertainment industry behemoth before TV networks and movie studios finally “got” digital distribution.
Or maybe not. There’s reason to believe investors who decide to buy Netflix now, even above $200, could enjoy further growth.
First, Netflix has more living rooms to conquer. Its subscriber base is just above that of premium cable networks Starz and Showtime, but Netflix still stands a good chance of surpassing even HBO’s 28 million subscribers, thanks to new device integration.
While analysts like Goldman Sachs’s Ingrid Chung see Netflix as the “killer app” that will fuel adoption of portable devices like Apple’s (NASDAQ:AAPL) iPad and Google (NASDAQ:GOOG) Android phones, Netflix is finding that its streaming service is most popular on living room devices like set-top boxes and video game consoles. The company said during its earnings call that more instant streaming viewing hours were logged on Apple TV, with an install base is just above 1 million, than the iPad, whose user base is over 15 million.
It bodes well for Netflix then that the Consumer Electronics Show earlier this month saw the introduction of televisions from Sony (NYSE:SNE), LG, Philips as well as Blu-ray players from Pioneer and set-top boxes from Logitech (NASDAQ:LOGI). Those manufacturers as well as others like Best Buy’s (NYSE:BBY) Dynex will be putting a Netflix button directly in remote controls, making the instant-streaming service an integral part of television viewing in the U.S.
With those devices hitting this year, it wouldn’t be surprising to see Netflix’s subscriber base hit 30 million by January 2012.
The second factor guaranteeing Netflix’s continuing growth this year is that television and movie studios still don’t have clearly defined digital distribution strategies, meaning they still need Netflix.
Internet television company Hulu, the joint venture of General Electric’s (NYSE:GE) NBC, Disney’s (NYSE:DIS) ABC, and News Corp.’s (NYSE:NWS) Fox intended to be a major competitor to Netflix’s streaming rental business, is a perfect example. The company shifted to a subscription-based premium service not unlike Netflix called Hulu Plus earlier this year. Now executives are arguing over its direction.
A Wall Street Journal reported Thursday that ABC and Fox are both considering pulling free content from Hulu, and there is broad discussion of transforming the entire business into an Internet-based premium cable channel, a sort of Web-only HBO. Meanwhile, those TV networks continue providing content to Netflix.
Netflix’s growth may hit a wall, in terms of new subscribers, revenue, and expansion into new delivery methods, but it won’t come this year. As of now, both content providers and other premium digital television and movie services simply don’t know how to take it on, which bodes well for 2011.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here.
