Netflix Battleground Status Continues (NFLX, BBI, CSTR)

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Netflix Inc. (NASDAQ: NFLX) is a true battleground stock.  It has a loyal customer base, a cult-like stock following, and trades with a very high short interest.  Shares are screaming today and have effectively hit not just 52-week highs… all-time highs. The earnings report showed a 48% profit rise and it raised its annual subscriber and financial metrics.  The company’s profit rose by almost 50% to $30.1 million, or $0.52 EPS.  But on a non-GAAP basis those earnings were $0.55 EPS.  Revenues rose by about 24% from a year ago to $423.1 million. Thomson Reuters consensus data was $0.49 EPS and $419.9 million in revenues.

Netflix gave revenue guidance for next quarter in a range of $440 to $446 million and put earnings at $0.38 to $0.47 EPS.  That is above an earlier range of $431 million to $445 million and above a $442.5 million target from Thomson Reuters. The estimate for earnings is $0.43 EPS.

The movie renter also ended the quarter with 11.1 million subscribers, up 43% from last year.  Its customer acquisition costs were also listed as $26.86 versus $32.21 a year ago.  Churn rates were up to 4.4% versus 4.2% a year ago. The company also expects to end 2009 with 12 to 12.3 million subscribers, well above a prior projection of 11.6 to 12 million subscribers.

As of September 30, the short interest was a whopping 13,807,227 million shares.  That was over 11-days worth of trading volume when the last short interest was announced.  We have seen several analyst calls:

  • Oppenheimer maintained an Outperform rating and lifted the price target to $42 from $38.
  • Merriman Curhan Ford & Co. maintained its Buy rating.
  • Kaufman Bros. maintained a Buy rating and raised the target to $55 from $53.
  • Janney has maintained a “Sell” rating and a target of $34.00
  • Wedbush Morgan also reiterated a “Neutral” rating.

The company also plans to roll out its online streaming service in the second half of 2010 for the international market.  Also noted was a coming partnership with an unnamed consumer electronics player that already has an installed base of subscribers.  It is not known if that is another game console maker, but the company’s exclusive streaming video with Microsoft Corporation (NASDAQ: MSFT) for Xbox is set to expire in November.

After going through the data, more than 40% of Netflix subscribers watched a streaming video as a movie or TV episode.  That is almost double of what it was a year ago.

It is no longer just Blockbuster (NYSE: BBI) competing against Netflix.  The rise of the Redbox kiosks from Coinstar Inc. (NASDAQ: CSTR) is making movie studios go to a temporary sales-only period for fresh hot releases as DVD sales have headed south.

While the company said it would not be opposed to this sales-only introductory period and that it would be able to reach good enough terms with the movie studios, this does pose one small hurdle.  A hurdle, but a small hurdle.  That temporary deal would harm Redbox more as those units tend to only offer a few new hotter titles.

Another issues that will either be a huge win or a hindrance down the road will be deals with cable and fiber to the home operators.  You could make the same argument that cable companies would partner with Netflix or would try to take the share all on their own to cut them out.

For a basic monthly subscription rate starting at $4.99 and unlimited streaming plans starting at $8.99, Netflix is a winner in the “stay at home” and is proving to be recession proof.  Shares traded down after the news last night, but shares are now up over 10% at $55.00 and traded as high as $57.50.  That is not just a 52-week high.  That is an all-time high.

JON C. OGG
OCTOBER 23, 2009