Ten Million Subscribers Can’t Be Wrong (NFLX)

On any given day, many stocks advance and many decline.  Lately it’s been much harder than usual to find companies that are going up.  Finding stocks worth owning is not much easier than finding a needle in a haystack.  That’s why we’ve mostly recommended cash and cash alternatives since the first of the year.

Still, every once in awhile we find something worth buying.  Netflix (NFLX) began as a small company with a big idea.  They thought Joe Consumer wouldn’t mind waiting a few days if he could get the latest movies delivered to his house.  They were right. 

Twelve years later, Netflix is competing against Goliaths like Blockbuster.  Their pioneer approach to home movies was made possible by the rise of DVDs and the fall of VHS.  Netflix’ simple process has gained 10 million households who left the Friday-night video store run, for a leisurely stroll to the mailbox.  Since 2003, NFLX has grown from a 6% market share to 18.2% at the end of 2008.  And they’re still growing.

As the sector continues to grow with adoption rates steadily improving, and now digital movie downloads, Netflix is positioning itself to be the #1 place for home entertainment.  In recent years, they embedded their software into Blu-Ray players, Tivo boxes, and now Microsoft Xbox consoles for games.  Consumers have caught on.  In fact, there has been talk of Netflix entering the video game rental category, another natural market segment that is untapped.  Solid marketing, a simple order process, an outstanding backend, and strong customer retention have all propelled Netflix to success.  We expect the trend to continue.

Netflix stock has followed the success of the company.  As investors shy away from most tech and media companies, many are still putting capital into solid ideas with long-term growth potential.  NFLX is such a company.  It doesn’t hurt that Netflix has a strategy almost tailor-made for the Frugalpalooza Age of tight schedules and limited entertainment budgets.  Since December 31, NFLX has jumped +21% after settling from a recent high.  It is currently trading in a range between $39 and $31. An entry anywhere near the middle of the range looks like a good place. 

Keep in mind, if you buy NFLX, you need to manage the trade appropriately.  Set appropriate stops (stop-loss prices) and profit targets.  Some investors like to “leg out” of positions as the price goes up.  As always, make sure NFLX is aligned with your overall investment strategy.  As consumers look for cheaper alternatives to $10 movie tickets, go with NFLX.

All the best!

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