Novice Investing - Watch You Flix Online

Date: Thursday 07th 2008f August 2008 01:41:14 PM

Watch You Flix Online - 08/06/2007

By: Novice Investing Staff

Netflix Inc. (NFLX) is the largest online movie rental in the nation with 6.74 Million subscribers. Since its launch in 1999, Netflix has grown subscribers at a rate of 79%. The latest earning report, however, shows the first ever subscribers loss in Netflix's history. This hammers the stock price and may create buying opportunity for investors.

At a recent share price of $ 16.57 per share, Netflix is valued at $ 1.12 Billion. Meanwhile, it has an attractive positive net cash of $ 400.4 Million. Further, while growth is still evident, Netflix is not bleeding money and is expected to post net income of $ 40 Million annually. That is a good value if you expect Netflix to be around for the next few years.

Looking ahead, Netflix is strengthening its position as the first mover in online movie rental. With a selection of 80,000 DVD titles, it gives an edge over competitors' brick and mortar stores. Further with 42 shipping centers, Netflix can reach 90% of US population within one day delivery. This helps Netflix to capture the growth in online movie rental which is expected to top 20 Million in the next six years.

Looking around, competitors range from Blockbusters which offers a combination of online movie rental with drops on return to Amazon.com which began offering movie download on its site. Blockbuster had an advantage of giving a more convenient way for movie watchers to order and return movies. However with 33600 employees and a net loss, Blockbuster is less efficient than Netflix. Unless of course, customers do really want to pay an extra premium to justify returning online rented movies to a Blockbuster store nearby. As of late, Netflix has around 1300 employees.

Meanwhile, Amazon is offering its 'unbox' service, which is an online movie download. You can rent a downloaded movie for $ 0.99 a piece, as opposed to renting DVD for $ 3.99 a piece at the nearest Blockbuster store. This plan is nicer than Netflix's monthly plan. With $ 16.99 plan for Netflix, where you can rent 3 movies at a time, you would need to ship 5 times each

month to break even. For a not-so active movie watcher, Amazon's unbox plan may be better. The problem lies in the length of the video download and the inconvenience of watching it through your computer screen. However, savvy movie watchers can always transfer the downloaded format into a big screen TV. Amazon's unbox plan is not without weakness. It can only be stored on your PC in 30 days and once it is played, you have 24 hours to watch the video.

Thus, despite threats from competition, Netflix is not toothless. Further, it has offered instant PC download on each of its monthly plan. This way, watchers do not have to download the movie and wait later to watch it. You can watch it now and at the moment, you can get the additional feature free with the mail-in subscription plan.

We believe that Netflix is in good shape to withstand the competition. With its current balance sheet and expected earning of $ 40 Million per year, Netflix is trading at roughly 18 times earnings estimate. That is not bad but it is not great either. If we could wait until Netflix trades at 10 times earnings, we would be more confident in purchasing Netflix. That is around $ 12 per share.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Netflix Inc. (NFLX) or any other securities.

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