Beyond Earnings… 8 Things To Help Netflix Stock Hit $400 (NFLX)

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Netflix, Inc. (NASDAQ: NFLX) is one of the top earnings reports for this week.  It is unlikely to be a market-mover, but Netflix is perhaps one of the top high-dollar stocks that active traders and momentum traders alike have chased and chased.  Shares were around $282 today ahead of earnings and its 52-week trading range is $95.33 to $304.79.  We are not going to call the stock overvalued today, because there has been a strong case that its shares have been overvalued for quite some time.  It hasn’t really mattered until lately.

The earnings report has dealt a serious blow to active traders and swing traders who were looking for gains on the earnings.  This scenario analysis about what could get Netflix stock has nothing to do with just this week’s earnings.  It doesn’t even have to do with next quarter’s earnings report.  This is looking further and further out…

As far as tonight’s earnings report, the news is good but not good enough and the stock is being punished severely.  The company showed that its subscribers are now 24.6 million strong, but promotions and subscriber acquisition costs were higher.  The report of $1.26 EPS managed to handily beat the $1.11 estimate from Thomson Reuters, but the $770 million sales figure was light.  Another issue is that the company does not plan to bid for Hulu as its ad-supported model is not its goal currently.  It is also not going to sell its DVD division.

The company is now targeting 24.6 to 25.4 million subscribers by the end of the third quarter. One interesting aspect ahead is that a Facebook integration is now expected before the next earnings report.  Unfortunately, the company is forecasting $780 to $805 million in domestic sales for the quarter we are currently in.  The total estimate from Thomson Reuters is more than $846 million. The company sees a lower add in domestic additions for this coming third quarter than for the third quarter of 2010.

After a huge run higher over the last year it is not really a shock to see this stock down so much after the report.  Shares are now down 9% at $255.00 in the after-hours session.  Netflix has risen handily before earnings and our question is simple…. Regardless of valuation opinions, what can Netflix really do to get its stock to $400 or higher per share?  We have several suggestions, some of which are obvious and some of which might not be obvious.

Underpromise & Overdeliver, But Keeping Solid Long-Term Forecasting…

Companies like Apple have made millionaires and (and probably a few billionaires) by simply ‘underpromising and overdelivering.’  Yes, the company has to keep beating earnings expectations.  The company has to maintain a slightly higher guidance than before but it has to also set the bar low enough that it can live up to expectations.  Estimates for the June quarter are $1.11 EPS and $791.48 million in revenues.  If you go out far, the 2012 targets from Thomson Reuters estimates are $6.65 EPS and $4.41 billion in sales.  With a near-$15 billion market cap today, perhaps the company could adopt a long-term forecast similar to what IBM has done… When the day comes that Netflix can claim a $1 billion per month in subscription revenues alone, who knows what the value will be from the market.  Did Reed Hastings just underpromise so he can overdeliver?

A Simple Stock Split…

The current trend in the market for growth stocks seems to be to keep high nominal share prices.  Look at Apple, Amazon, Google, and Priceline.  Still, Lululemon recently has seen its shares soar since its 2-for-1 stock split was declared.  Netflix did announce a 2-for-1 stock split in January 2004 when shares were at $65.80 and shares jumped to $77.77 on the split announced with earnings and those prices are not adjusted for the split today.  An 18% gain from beating earnings and announcing a stock split is impressive enough, and if you did that from today’s price you would instantly have a $330 share price or so.

Communicating Price Structure Better…

Shares have faltered since Netflix changed its pricing structure.  Maybe you can blame Washington D.C. or maybe you can blame other economic uncertainty.  The price structure change is the recent drag.  Customers have resistance to change.  What the company needs to truly communicate is that this not only deals with holes in the digital model.  It needs to show better that this will maximize revenue growth and profits.  Higher subscriber acquisition costs on top of a price change won’t be great, particularly if its DVD model peaked.