Is Netflix, Inc. (NFLX) A Bottle Rocket: Fast Up But Short-Lived?

By Mani
Updated on

Netflix, Inc. (NASDAQ:NFLX) shares are now up 148 percent year-to-date, on the back of its original content attracting new subscribers and with more shows in the works.

Is Netflix, Inc. (NFLX) A Bottle Rocket: Fast Up But Short-Lived?

Netflix, Inc. (NFLX) Best-Performing Stock

The leading Internet television network, Netflix, Inc. (NASDAQ:NFLX), has thus become this year’s best-performing stock in the S&P 500 (INDEXSP:.INX).

However, just in the summer of 2011, Netflix became a pariah of Wall Street, after the company announced price hike and its abrupt decision to split its DVD rental and content-streaming businesses. These actions forced thousands of its subscribers to flee and its stock took a beating.

Since then the company reinvented itself by moving away from just a pure content distributor to become more like a network, with some of its original programming.

However, creating original content is an expensive option, as opposed to licensing it from others. In its last month letter to investors titled “Long-Term View”, Netflix, Inc. (NASDAQ:NFLX) exuded confidence by emphasizing over the coming decades and across the world, Internet TV will replace linear TV. The company is already spending over $2 billion a year, both in licensing content from others and in the creation of original shows.

The success of its recent original series “House of Cards” reinforces the company’s conviction to develop its own shows.

In its recent first quarter 2013 results, the Internet streaming service highlighted that it already dominates the industry, by adding two million new U.S. subscribers to its streaming service during the quarter, making its total U.S. subscriber base to over 29 million. This made Netflix, Inc. (NASDAQ:NFLX) as a more popular entertainment option than cable networks.

The surge in Netflix, Inc. (NASDAQ:NFLX)’s subscriber base was attributed to its focus on providing exclusive original content, which has helped it to leapfrog over competitors such as, Inc. (NASDAQ:AMZN) and the new Redbox Instant service of Verizon Communications Inc. (NYSE:VZ).

Some analysts believe Netflix, Inc. (NASDAQ:NFLX) will continue to post superior performance with its increased market share through continuous investment in original content. Further, its dominant market position is likely to lead to more content providers signing-up. Besides with the cost of other entertainment options surging, more users are expected to sign-up for a Netflix subscription.

However some analysts feel the valuation of Netflix, Inc. (NASDAQ:NFLX) share are expensive at 100 times its 2013 estimates. Further with Inc, Hulu and others started embarking on an original content strategy and Netflix DVD rental business declining sharply, Netflix could face pricing pressure in the market.

Wedbush Securities senior analyst Michael Pachter feels by looking at Netflix, Inc. (NASDAQ:NFLX) as a ‘sum of the parts’, a significantly lower valuation at one times revenue is justified.

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