Buy Netflix, But Only on the Dip
Remember when Netflix (NFLX) was left for dead a year ago?As we all know, Netflix didn't falter for long.
Instead, the online DVD rental champ blew its naysayers out of the water.
Netflix added nearly 1.6 million customers last year, giving it 4.2 million subscribers through December.
At a decent multiple, we think Netflix (which is profitable and cash flow positive, thanks to a great business model) is worth owning.
One, NFLX's customer base is remarkably loyal, and by hitting a critical mass point, Netflix has gotten closer to that subtle point where switching costs could be high enough to dissuade customers from leaving.
The second thing about Netflix that astonishes us is its projected revenue-per-subscriber numbers. Netflix grew its subscriber base over 60% last year, amidst a less than favorable milieu. Netflix's rivals have ramped up promotional efforts in order to steal Netflix's customers, who haven't fallen for lower price points. That attests to Netflix's brand power.
Finally, we like Netflix because its a veritable niche play.
Netflix is giving Blockbuster (BBI) a whooping because Blockbuster is a brick and mortar.
Blockbuster can't afford to hold assets that they may or may not rent out. In contrast, an online retailer like Netflix specializes in catering to minority tastes and leverages its capacity to operate shelf-free.
Because specialized markets are more predictable, the risk of failure is much lower, and so small-to-mid-budget movies can be very profitable.
We forsee accelerated subscriber growth for Netflix in F2006.
With the Walmart/Amazon threat waning (Walmart will likely stick to selling DVDs -- not renting them -- while we think Amazon would be foolish to try and penetrate a price sensitive domain that their distribution network isn't even prepared for), Netflix could see more upside, but we suggest investors wait for a pullback before picking up shares.
If Amazon does push into DVD rentals, kiss Netflix goodbye. Netflix's margins and growth will be punished if Amazon opens up its deep pockets.
Netflix already gave investors a mega-haircut -- it could certainly give them another one should they be caught unprepared.
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