Tags: netflix | NFLX | investment | Internet TV

David N. Frazier: Netflix Revenue, Earnings to Stream Higher but Watch Its Stock

By    |   Tuesday, 18 March 2014 12:27 PM

Netflix Inc. (NFLX) is one of those rare exceptions in corporate America where the company’s management has continuously executed a successful strategy to accomplish the most-important goal of any business: maximizing shareholder value.

Netflix is the world’s leading Internet TV network, with more than 44 million members in more than 40 countries around the globe.

Members of the company’s service can watch as many movies (and original-content television shows) as they choose, anywhere and at any time on almost any Internet-connected screen, including desk-top and notebook computers, as well as various types of mobile electronic devices. Members can play, pause, and resume watching any of the company’s content without the distraction of commercial advertisements.

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Through Netflix’s DVD-by-mail service, the company’s members can also receive DVDs and Blue-ray discs delivered directly to their homes.

The Los Gatos, California-based company derives its revenues from monthly membership fees that it charges for its services. Its U.S. streaming membership plans are priced at $7.99 per month for a basic plan, or at $11.99 per month for members who want to watch the company’s videos on up to four devices concurrently. Its foreign-country streaming membership plans, which are offered in Canada, Latin America, the United Kingdom, Ireland, Finland, Denmark, Sweden and Norway, are priced in terms of a given country’s currency at the equivalent of $7 to $14 per month.

The company’s DVD-by-mail membership service ranges from $4.99 to $43.99 per month according to the plan chosen by the member. Members electing access to high-definition Blu-ray discs in addition to standard-definition DVDs pay a surcharge ranging from $2 to $4 per month for the company’s most popular plans.

Netflix has boosted its revenues at a fast pace ever since its founding on Aug. 29, 1997. Except for the year 2012, the company has increased its net profits every year since the company went public during 2002.

After growing its revenues to $1.7 billion during 2009, from $1.4 million during 2000, Netflix began offering its services in Canada during September 2010.

In 2011, the company launched its streaming services in Latin America, followed by launches in the United Kingdom and Ireland during January 2012; Finland, Denmark, Sweden and Norway in October 2012; and the Netherlands during September 2013.

My research indicates that Netflix will continue to increase its revenues and earnings at a fast pace for at least the next several years. However, that same research indicates that stock market participants are overvaluing the company’s stock substantially at this time, with NFLX having an estimated price-earnings to growth (“PEG”) ratio of approximately 4.8 as of March 17. (Editor's Note: The PEG ratio is the price-earnings ratio divided by the growth rate (based on the consensus of professional analysts). Nasdaq.com stats that "in theory, the lower the PEG ratio the better — implying that you are paying less for future earnings growth.")

During the next several years, the company plans to continue to expand its services internationally, including a substantial expansion this year in Europe.

In addition, the company plans to continue to offer exclusive, original TV shows, like its Emmy and Golden Globe winning House of Cards series, staring Kevin Spacey, that the company launched during 2013.

Unlike traditional television networks, Netflix has a major advantage over its competitors in regard to launching a TV show: While the networks need to attract an audience on a given night and at a given time, Netflix can be much more flexible. And, because shows offered via the company’s streaming video service don’t need to compete for scarce prime-time slots like those offered on traditional TV networks, Netflix can allow much more time for its audiences to become familiar with and to enjoy its shows. Hence, the company can offer any of its original content over the course of an entire season instead of providing only pilot episodes of those shows.

Although I expect Netflix to continue to be successful in growing both its revenues and earnings at a fast pace, I would advise even very aggressive stock market speculators to avoid putting any of their money into NFLX at this time because of its extremely high valuation.

However, I encourage both investors and speculators to monitor NFLX on a regular basis. If the stock were to decline to around $180, I would likely recommend purchasing NFLX.

By midday Tuesday, NFLX was down $2.71, or 06 percent, at $420.01 in Nasdaq trading.

Note: For those of you who think that NFLX will never fall to that level, you should note that the stock declined by a whopping 82 percent from mid-2011 to mid-2012 – from $298.73 on July 13, 2011 to $53.80 on Sept. 25, 2012.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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Although I expect Netflix to continue to be successful in growing both its revenues and earnings at a fast pace, I would advise even very aggressive stock market speculators to avoid putting any of their money into NFLX at this time because of its extremely high valuation.
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2014-27-18
Tuesday, 18 March 2014 12:27 PM
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