Netflix shares jumped today after the company announced a streaming-only plan for just $7.99 per month. But the stock also got a boost as Oprah Winfrey gave away to her show’s audience on Friday a five-year membership of the service as part of her famous ‘Favorite Things’ annual holiday giveaway.
But while Oprah has now put Netflix officially on the pop culture map, investors are wondering if the story is now priced in, especially with likely margin pressures ahead and increased difficulty in securing content deals.
“It is amazing to watch one of the most powerful and influential media personalities in the entire world educating consumers about streaming movies directly to their television,” wrote BTIG’s Richard Greenfield, in a note to clients. “While Netflix may offer content owners attractive near-term cash, its underlying business model continues to devalue individual pieces of content itself by reducing the time value of content.”
Netflix shares hit a new all-time high today and have now more than tripled this year. Last month, Netflix said that third quarter earnings jumped 26 percent and that its gross margin increased to 37.7 percent from 34.9 percent.
“The trade in here reminds me of Crocs rallying in 2006,” said J.J. Kinahan, chief derivatives strategist for TD Ameritrade’s Thinkorswim, who put a bearish position on Netflix this morning using options. “When they turn, they turn hard.”
The latest numbers from cable companies showed that they are losing customers by record numbers as many users, especially the younger ones, find Internet streaming services like Netflix, Apple TV and Google TV to be good enough as an alternative to cable given the economic environment. Oprah’s endorsement now legitimizes this practice for an older audience. Netflix is considered the best of the streaming services out there, but in an increasingly crowded field, it’s tough to maintain profit margins.
“We think that many of the company’s customers currently on the $8.99 plan rent few physical DVDs, and expect the majority of these customers to migrate to the $7.99 plan, costing the company some revenue without a corresponding cost saving,” said Edward Woo, a Wedbush Securities analyst who rates the share an ‘underperform’. “Today’s news reinforces our belief that Netflix will continue to spend heavily to add streaming content. As the company continues its shift towards a streaming-centric business model, we believe it will continue to upgrade its online content library, particularly given increasing competition from Hulu, Apple, Amazon, and other competitors.”
But this content doesn’t come cheap. Especially when those who you’re buying from realize you’re undercutting their own business. Netflix is paying $1.2 billion in rights fees, its biggest cost currently, and that figure is only going to get higher. And on the competition front, Hulu recently slashed the price of its streaming service.
“Buy puts on the Oprah pop,” said Michael Block, chief equity strategist at Phoenix Partners Group. “Streaming doesn’t work when your content deals die.”
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Trader disclosure: On November 22, 2010, the day this video was recorded, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Adami Owns (AGU), (C), (NUE), (MSFT), (INTC), (BTU), (GS); Weiss Owns (MEE), (TSN), (QCOM), (JWN), (UAL), (CYT), (DIS); Weiss Is Short (UNH) Calls; Weiss Is Short (LCRX); Finerman's Firm Is Short (IJR); Finerman's Firm Is Short (MDY); Finerman's Firm Is Short (SPY); Finerman's Firm Is Short (IWM); Finerman's Firm Owns S&P 500 Puts; Finerman's Firm Owns Russell 2000 Puts; Finerman Owns (AAPL); Finerman Owns (BAC); Finerman's Firm Owns (GENZ); Finerman's Firm And Finemran Own (HPQ); Finerman's Firm And Finerman Own (JCG); Finerman's Firm Owns (JPM) Leaps, Finerman Owns (JPM); Finerman's Firm Owns (SKS); Finerman's Firm Owns (TGT); Finerman's Firm Owns (WMT); Seymour Owns (AAPL), (BAC), (INTC), (IPI), (POT), (HPQ); Jon Najarian Owns (SNDK); Jon Najarian Owns (AKAM); Najarian Owns (CRUS), Is Short (CRUS) Calls
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