The Motley Fool has been making successful stock picks for many years, but we don’t always agree on what a great stock looks like. That’s what makes us “motley,” and it’s one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market’s best and worst stocks, which we’ll rate on The Motley Fool’s CAPS system as outperformers or underperformers. We’ll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we’ll be discussing DVD and streaming content king, Netflix, Inc. (NASDAQ:NFLX).
Here’s a quick snapshot of the company’s most important numbers:
| Statistic | Result (TTM or Most Recent Available) |
|---|---|
| Market cap | $9.76 billion |
| Revenue | $3.61 billion |
| Price/book | 13.0 |
| Price/sales | 2.7 |
| Price/cash flow | 454.5 |
| Forward P/E | 65.8 |
| Cash/debt | $748.1 million / $400 million* |
| Subscription breakdown | Domestic streaming: 27.15 million subs International streaming: 6.12 million subs Domestic DVD: 8.22 million subs |
| Key competitors | Amazon.com, Inc. (NASDAQ:AMZN) Coinstar, Inc. (NASDAQ:CSTR) DISH Network Corp. (NASDAQ:DISH) |
Sources: Netflix investor relations, Yahoo! Finance, and Morningstar.
*Does not include debt offering announcement on Jan. 29, 2013.
Sean’s take
“It’s up. It’s down, It’s dead. It’s not, but DVD subscriptions are down. No, wait, streaming subs are way up.” And that’s just the past three months for Netflix! It’s a company that can give investors indigestion and movie-seekers pleasure all at the same time. The question must be asked, “What’s next for Netflix: $300 or $50?”
To answer that question, I think we need to look at how Netflix got here and what it’ll have to contend with moving forward.
On the plus side, Netflix clawed itself back from the threat of ignominy by striking a movie-licensing deal with The Walt Disney Company (NYSE:DIS) that’ll give it exclusive access to Disney, Pixar Animation Studio, and Marvel Studio production and allow direct-to-video Disney releases beginning this year. With content costs rising, this was a key win for Netflix and is sure to keep its foothold strong in family households with children.
Another turning point for Netflix was its push overseas and its renewed focus on its streaming business. By spending big on popular movies and shows, Netflix has been able to offer consumers a best-in-class digital library for a very reasonable price (now that its PR gaffe is in the rearview mirror). The result was the addition of 9.74 million streaming subscriptions in 2012, with a big push internationally, where subs more than tripled to 6.12 million.
On the other hand, there are a number of troubling trends that could weigh Netflix down. With content costs rising, Netflix’s cash position is nowhere near as optimal as Amazon.com. In fact, Netflix actually had a free cash outflow of $58 million. If it’s unable to generate sufficient cash flow from operations, it’ll need to issue debt and shares to cover its large content deals.
The slow death of its DVD business is another concern. Although the trend of subscription losses has leveled off a bit, Netflix nonetheless lost 26% of its DVD subs in 2012. I know what you’re thinking: “DVD subs are so 2009!” And you’re right. The problem is that DVDs were an extremely high-margin business for Netflix, so while streaming subs are booming, they’re not replacing the high-margin losses from the DVD side of the business. In addition, Coinstar’s RedBox DVD rental machines and its partnership with Verizon Communications Inc. (NYSE:VZ) in streaming, as well as DISH Network‘s Blockbuster stores, are further challenges to Netflix’s already sagging DVD business.
