Stock Brawl: Netflix


Netflix is the world’s leading Internet subscription service for movie and TV content, with a market cap of $9.96B and over 16 million members.

The company has been the best stock in the Russell 1000 over the past 3 1/2 years. No wonder our Bull, Porter Bibb, remains positive on Netflix. However, our Bear, Tony Wible, does not think this stock is a good investment.

Here’s how they weigh in:

Making Their Case: The Bull

Porter Bibb, Managing Director, MediaTech Capital Partners

The rate at which Netflix has grown is a huge confidence boost. Bibb says that the company is adding 2 million new subscribers per quarter, finishing 2010 with 20 million total customers. Stock price has increased four-fold over the last 12 months and is likely to continue to rise with analysts’ estimating a $204 stock price for Q1 2011.

Bibb also notes that Netflix is a 'game changer' that will make DVDs and also many of the set-top boxes offering streamed video (Roku, Slingbox, etc.) obsolete. It is also a serious threat to cable MSOs and the main reason cord cutting has increased for the past two quarters and is likely to become more widespread as new subscribers sign up for Netflix.

Netflix now has rights to 100,000 movies/TV shows and is streaming 20,000 titles over internet. Netflix announced this week it will spend at least $2 billion in 2011 acquiring more movie/TV content. No one else comes remotely close to offer this many titles. In addition, Bibb says the company’s new streaming service announced earlier this week is a tipping point for delivery/distribution of film/video content to consumers.

Making Their Case: The Bear

Tony Wible, Analyst, Janney Montgomery Scott

Janney Montgomery Scott recently downgraded Netflix from “Neutral” to a “Sell” rating. Wible says, “While we continue to see NFLX exposed to intensifying competition, rising content costs, and ARPU pressure from the digital migration, we believe NFLX is proving to be more nimble than the competition and now see a greater offset to these risks from the aforementioned drivers.” Based on the overall lower risk, Netflix is now assigned a 25x multiple to our new 2012 EPS to derive a $145 fair value.

Wible goes on to say that Netflix reported EPS of $0.70 (+35.3%) on revenue of $553.2 million (+30.7%). This is lower than his projections of $0.72 and $558.0 million.

Netflix may be close to monetizing new opportunities from the sale of a la carte content, liquidation of old DVD library, and the introduction of a streaming only tier that will force subs to place a value on discs. Furthermore, Wible believes cord cutting or shaving could reinvigorate demand for multi-disc plans as the trade down on MSOs could be complemented with a trade up on Netflix.

One of the biggest factors weighing on Wible’s outlook is the derivative impact of Net Neutrality. The FCC has hinted that Usage Based Billing (UBB) may be permitted to compensate for the tremendous Cap Ex put forth by cable/telco operators. With usage charges of $1/GB, NFLX would lose its significant price advantage over cable. He notes that many countries do not currently have any laws enshrining Net Neutrality.

Netflix is the company up for debate on today’s “Stock Brawl” on Closing Bell at 3:15PM ET.

Crystal Lau contributed to this article.

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