by Thomas Young
On April 21st,
will announce quarterly earnings.
Here's how the Netflix stock has responded to the past four
earnings announcements (April 2013, July 2013, October 2013, and
Netflix, Inc - Quarterly Earnings Per Share |
Though the market often reacted negatively to Netflix's 2013
earnings announcements, the company's 2013 performance was actually
quite good on the whole, with gross revenue climbing from $3.6
billion to $4.4 billion and net income jumping from $17 million to
What's driving the strength in the Netflix balance sheet and
overall market gain? What's the likelihood that it will continue?
Here are five reasons for Netflix's strength.
First, Netflix continues to exhibit the desire and ability to be on
the cutting edge of innovation. For example, Netflix recently
announced the ability to watch shows in 4K resolution (roughly four
times as many pixels as a 1080p display). Although many early
adopters may not be able to take advantage of the ultra-high
definition content, the signal that Netflix is ahead of the game
matters for customers, and happy customers make for happy equity
Of course, development and implementation of 4K content is only one
small indication of Netflix's reputation as a high-end innovative
firm (even among technology firms!). Netflix CEO Reed Hastings has
on how to implement a continuously innovative culture in the
corporate world. If there's one thing that describes Netflix's
creative culture, this is it:
"If you want to build a ship, don't drum up people to gather wood,
divide the work, and give orders. Instead, teach them to yearn for
the vast and endless sea." ~Antoine de Saint-Exupéry
Second, Netflix has quickly become the standard for television
watching outside of traditional TV. The product is particularly
popular among younger TV watchers.
As the pioneer in the area, Netflix continues to have the
first-mover advantage over competitors such as Amazon's (
) Instant Video, Hulu, Apple (
), and HBO (subsidiary of Time Warner Cable (
Netflix, Inc - Competitors | FindTheBest
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As another example of Netflix's leadership, Netflix became the
first ever non-traditional film or TV studio to be nominated for an
Academy Award, receiving a nomination for
, a Netflix Original production. Netflix also hosts its own awards
Netflix is the "keeping up with Joneses" leader in online TV and
entertainment in general. As long as Netflix stays at the cutting
edge of product development and offerings, the Netflix status
symbol won't go away anytime soon.
Third, Netflix is an attractive takeover target for a company like
Apple or Comcast. Rumors of a takeover bid by Microsoft or Carl
Icahn began in 2012, with even Mad Money's Jim Cramer getting in on
the rumor mill.
In November 2012, in a bid to fend off a hostile takeover bid by
Mr. Icahn, Netflix adopted a "shareholder-friendly" poison pill.
The main provision of the plan was the stipulation that if any
investor amassed more than 10% of the company's stock, every other
shareholder would be able to purchase discounted shares, thereby
diluting Mr. Icahn's ownership.
In a change of course from the Mr. Icahn-induced poison pill, the
Netflix board voted to terminate the poison pill plan two years
early, on December 31, 2013 instead of November 2, 2015.
There is not as much speculation in 2014 as there was in 2012 on a
Netflix takeover, largely because Netflix's stock price has done
quite well. With that said, Netflix is on many investors' and
corporations' radar. Should the stock price depreciate
substantially-perhaps in the $300 range - speculation of a takeover
will likely ramp up.
Fourth, Netflix only has 44 million subscribers worldwide. The
number of households in the world is somewhere around 3.2 billion,
with around 120 million in the United States. Presuming 75% of the
world's households are unable to take advantage of Netflix content,
for reasons such as insufficient bandwidth or lack of financial
resources, then there's 800 million households Netflix can
realistically offer its services to. If Netflix captured 10% of
that market, that's 80 million households, or around double what
the company currently has.
This 75% not-eligible/10% market capture scenario is an
ultra-conservative scenario. The bottom line is that Netflix still
has a long way to go before the market for its product is
Fifth, the economy is positioned to expand at a quicker pace over
the next two years than in the previous couple of years. With an
accelerating economy comes a stronger consumer balance sheet.
Which sector is a big winner as a result of increased consumer
purchase power? Consumer Discretionary. What is an important
component of the Consumer Discretionary sector? TV and
entertainment. If you're a cyclical investor, now is not the time
to leave Netflix's sector. The familiar pattern with 2013 earnings
would indicate that the market might be disappointed with the
, especially with the spectacularly awesome results in January
Because of the increased expectations set by January's quarterly
earnings, investors shouldn't be surprised if the market reacts
negatively on April 21. However, the 2013 experience also indicates
that investors will likely see a company still on an exponential
Given that Netflix is on the leading edge of innovation and content
within the broader online entertainment world, if one sees online
entertainment as a boom of the future (even more so than now),
Netflix is a must have in your portfolio.
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