Home > Finance, Investment Ideas, Tech > Revisiting Netflix and Media Consumption

Revisiting Netflix and Media Consumption

One of the most read posts so far on this blog has been my take on Netflix and the New Media Model.  At the time, many had been asserting that the stock (then trading at just north of $70) was the most overvalued stock on the market (check out this from Crossing Wall Street or this from Felix Salmon).  With the broader indices now trading well below where they had been on April 1st, Netflix on the other hand, is trading at a nearly 50% premium.  The overvalued argument relied on an analysis of the stock based on traditional valuation metrics, such as P/E ratio, revenue growth, profit margins, etc.  Moreover, the naysayers argued that the DVD-by-mail model came with serious risks and that growth in the space was particular vulnerable to changes in Post Office rates or policies.

What these people missed is that the transition into streaming and the expansion of on-demand and its ability to meet the whims of today’s me-want-now mentality opened up opportunities previously unimaginable for entertainment consumers and investors alike.  The margins are exceptionally high when it comes to streaming and the growth is outstanding.  With their placement on all of today’s popular gaming consoles (just last night I streamed Bugsy through my playstation) and devices such as the Roku, streaming Netflix has become a popular way to watch movies across generational lines (my dad LOVES his Roqu and we just installed one in Emily’s family’s home).

Yesterday, through Silicon Alley Insider, I stumbled upon CEO Reed Hastings’ presentation on the Netflix business plan and the report fully confirmed what I expected to hear and expanded upon my initial investment theory with clear and concise information about Netflix present business, future endeavors and potential risks.  By 2013, Netflix expects to reach “peak DVD” in 2013, at which time, streaming will reign supreme as the venue of choice for subscribers to watch their TV and movies.  Additionally, Hastings outlines how Netflix aims to complement people’s existing sources of entertainment, rather than replace any altogether.  The company is using their growing cash position in order to access a wider variety of media content and to build out their ever-growing library of streaming media.  This niche, through which people can enhance their media experience with a cheap, flat-rate, vast library accessible with the push of a button from the living room couch is fundamentally changing the way that TV is watched and video entertainment consumed.

With the rapid uptake of mobile devices like the iPad, the mobile market creates another avenue through which Netflix subscribers can gain value from their flat-rate subscription.  This company is an incredible innovator and consistently stays on the cutting edge of every subtle change in our media consumption habits.  And look out investors (and shorts!), towards the end Hastings’ declares that Netflix will seek to expand internationally.  This growth story is not coming to an end just yet.  Without running through too many of Hastings’ points, I invite you all to check out his presentation attached below:

Netflix Business Opportunity

Disclosure: No position in NFLX at the time of this writing.

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