Why Aren't Analysts Jumping on the Netflix Bandwagon?

Netflix, Inc. (NFLX) has become a very hot stock recently.  The stock is currently trading at $229 (which is down from a high of $254) and has seen over an 1000% return in just over nine months under Netflix CEO Reed Hastings.  In its most recent Q1 earnings report, Netflix reported it currently has 21.4 million subscribers, which is up 57%.  The company’s earnings are also up 88% in the most recent quarter.  Netflix is also planning on expanding its service to other countries, it recently launched its streaming-only service in Canada.

Netflix earns a majority of its revenue through its subscriptions which start at $8.99 per month in the U.S. and $7.99 in Canada.  The company expects to see the majority of subscribers move over to its streaming services within the next year.  The streaming services cost significantly less than its DVD delivery service.

This is for several reasons, but the majority of the costs associated with streaming content is acquiring the license to stream it.  The actual streaming costs are much more reasonable.  In fact, a full length movie can be streamed for approximately five cents.  Whereas, DVD’s on the other hand, have to be purchased and repurchased (if damaged) and additionally require postage to ship across the country (which may even get more expensive if postage rates increase).  It’s obvious why Netflix is pushing its customers towards streaming content.

Netflix is also deeply integrated within people’s homes.  Its platforms on XBOX, PS3, the iPhone, iPod, iPad, Apple TV, Boxee Box, and Google TV which allow you to seamlessly watch Netflix content on those devices.  It is also worth noting that despite the potential competition from cable companies, Netflix has very good brand equity.  People are familiar with the name and that is very important.  At this point, I’d speculate that even older brands such as Blockbuster can’t compete with the name Netflix.

Additionally, Netflix has recently acquired the rights to its very own TV show “House of Cards” and it plans to obtain licenses for another two or three shows in the future.  Original content will be beneficial for Netflix, instead of just relying on “re-run TV” and movies they now have other ways to attract new customers.

Despite what some analysts are saying about NFLX, I would recommend this stock or at the very least put in a call option for it.  I think the company has a lot of room to grow, especially as they continue to roll out in new markets.