Netflix (NFLX) is rebounding after a series of managerial blunders and fears of obsolescence saw the stock price plunge over 80% from 2011 highs of nearly $300 a share.
What’s changed?
Internet analyst Mark Mahaney from Citigroup has a price target of $120 citing improvement in customer satisfaction. Here is an analyst with a buy on NFLX who just last month expressed concerns over content acquisition and retention at the company. In the Citi survey, 48% of customers now say they are “extremely satisfied” compared to the 44-45% 6 months ago. Given the sample size of the survey, 3,800 US subscribers out of over 27 million, the results aren’t that significant but this is good news for Netflix.
The subscriber is always right
Netflix has learned this the hard way but its strategy in providing niche content through its recommendation system has helped cushion its fall. Netflix may have 27 million subscribers at the moment but how many unsubscribed users are still in their database who are going to come crawling back? There are several catalysts to consider for return subscriptions, mainly content-driven.
Netflix has exclusive distribution rights for new episodes of Arrested Development next year which are being promoted right now. Netflix commissioned series, “House of Cards” from director David Fincher, is also slated for release early next year. The television content department has been busy lately; the Netflix blog has announced new shows for instant viewing from cult-series Freaks & Geeks to Gossip Girl and Glee.
Navigating risks
The competitive landscape of the video on demand (VOD) market is as heated as ever. Toy “R” Us just announced its endeavor into the streaming space with toysrusmovies.com targeted towards kids and a tablet of its own called Tabeo. The news follows on the coattails of Netflix’s launch of a kid-friendly platform “Just For Kids” for the iPad at the beginning of this month.
Increasing usage of tablets and phones for streaming will provide some relief for the highly competitive VOD market that includes Amazon (AMZN), Apple’s iTunes Store (AAPL), and Wal-Mart (WMT). Netflix has done well in translating to portable devices especially the iPad.
Netflix’s performance in the last 3 years with earnings dates denoted ‘E’:
Netflix will announce its Q3 results on October 23. Here’s a snapshot of the big VOD players:
List Average 1-Year Return: 29%
1. Netflix, Inc. (NFLX, Earnings, Analysts, Financials): Provides subscription based Internet services for TV shows and movies in the United States and internationally. Market cap at $3.14B, most recent closing price at $56.46.
2. Amazon.com Inc. (AMZN, Earnings, Analysts, Financials): Operates as an online retailer in North America and internationally. Market cap at $113.29B, most recent closing price at $250.60.
3. Apple Inc. (AAPL, Earnings, Analysts, Financials): Designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Market cap at $619.92B, most recent closing price at $661.31.
4. Wal-Mart Stores Inc. (WMT, Earnings, Analysts, Financials): Operates retail stores in various formats worldwide. Market cap at $247.91B, most recent closing price at $73.75.
5. Best Buy Co. Inc. (BBY, Earnings, Analysts, Financials): Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. Market cap at $5.71B, most recent closing price at $16.97.
And don’t overlook cable on demand:
6. Comcast Corporation (CMCSA, Earnings, Analysts, Financials): Provides entertainment, information, and communications products and services in the United States and internationally. Market cap at $95.9B, most recent closing price at $35.84.
7. Time Warner Inc. (TWX, Earnings, Analysts, Financials): Operates as a media and entertainment company in the United States and internationally. Market cap at $42.99B, most recent closing price at $45.30.
8. Dish Network Corp. (DISH, Earnings, Analysts, Financials): Provides direct broadcast satellite (DBS) subscription television services in the United States. Market cap at $13.83B, most recent closing price at $30.69.
Written by Freda Ding.
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Netflix has a unique algorithm that can figure out what users want, like Amazon. The problem is their business model is still broken, and their costs are soaring. Netflix expanded internationally at the wrong time, and content deals are getting expensive (whenever they can win a deal).
True, their streaming business is a lower margin business with high ad spend and content costs. But in the long-term, if subscribers keep coming back to Netflix instead of running to Amazon or iTunes, then you're going to see those costs turn into profits.