Why Netflix is at $600

Netflix soared past $600 for the first time and naysayers immediately suggested that this is the clearest sign yet that we are in the middle of a technology bubble.

The Netflix Inc. website displays the 'House of Cards' series.
Andrew Harrer | Bloomberg | Getty Images
The Netflix Inc. website displays the 'House of Cards' series.

There are plenty of reasons to think that the technology sector has rallied faster than is reasonable. For the first time since 2007, we are beginning to see stock prices outpace corporate earnings and that certainly is a warning sign to be aware of. Likewise, venture-capital companies are throwing money at new ventures — all based on the expectation that web views and user engagement will eventually turn into profit (which is not necessarily the case).

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That's not the Netflix model. Netflix isn't at $600 because of a technology bubble. The reason the company is doing so well is that it has established itself as the lead player in a new unbundled, mobile-communication space, focused on consumption of media on variety of devices. It's a space that Hulu had claim to, but Hulu simply did not execute.

This new business model is a lucrative one and everyone with a cell phone, computer,or tablet is a potential customer. Apple's latest expected venture into the media space, Apple TV, will be designed to grab share from more established content providers just as Netflix is doing. It's a gold rush to tear away customers from traditional providers.

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Much has been made of the programming costs that Netflix will have to pay as the service continues to grow and content providers seek to capitalize on the demand for programming. While it is true that costs will rise, the Netflix subscriber base continues to expand and they will have more dollars available to purchase content as well as develop original programming. Like Amazon, Netflix has been successful in generating subscribers based on new content.

What some investors miss is the addressable opportunity that Netflix, Amazon, Hulu, and soon Apple seek to capture. Established content providers continue to struggle to provide appealing alternatives to these upstart competitors. Netflix is benefiting from the missteps of the more established cable companies and that is why the current price has rocketed forward. Netflix is winning; there's no other way to say it.

Just like Apple, this is a company that looks to be profitable for a significant period of time and might very well make sense as part of a core media/technology holding for investors.

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Commentary by Michael A. Yoshikami, the CEO and founder of Destination Wealth Management in Walnut Creek, California.

Disclosure: Michael Yoshikami owns Apple and Disney shares. Destination Wealth Management may buy these and other stocks mentioned in the article for clients.