Once upon a time a company called Netflix went public, offering shares of the firm for $9. That was 2002. It’s 2015 now and those shares are worth over $550 apiece. That means $1 invested in Netflix in 2002 would be worth $63 today!


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The market is rewarding Netflix for its latest numbers. It crushed its targets on new members, adding 4.9 million new subscribers globally in the first quarter of 2015, well beyond its target of 4.1 million. Netflix now has 62.3 million subscribers in total!

Curiously the rise in share price comes hand in hand with a fall in profits. The company missed its forecast for the quarter, earning only $24 million in this year’s first quarter against a forecast of $37 million. When compared to the $53 million earned in the same period a year ago, it doesn’t make for sensational reading.

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FBR Capital, an investment management firm, even upgraded Netflix – calling for its price to reach $900 as it continues to outperform the market.

Their analysis leaned heavily on surveys conducted in collaboration with ClearVoice Research, in which they found that nearly 40% of U.S. households prefer Netflix to TV. The survey also found that more than half (57%) of Netflix subscribers would keep Netflix over traditional if a choice had to be made. 49% said they watched Netflix more than TV.

FBR also estimated Netflix would be able to grow its audience to 180 million subscribers worldwide by 2020. The internet streaming service experienced strong growth in over 50 international markets – launching in Australia and New Zealand in March of this year, with plans to conquer Japan in late 2015. Increased investment in international expansion, where content acquisition costs can be expensive, is likely the cause for the weak earnings result.

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FBR Capital’s analysis is extremely enthusiastic, but other analysts are similarly bullish on Netflix, just not to the same degree. For instance, many analysts only raised their estimate to $500, which the Netflix stock easily surpassed.

Concerns

There are some potential headwinds to Netflix’s growth. The strength of the U.S. dollar means that profits from overseas are affected; converting those euros and pesos back to dollars means taking a slight loss. Revenue from the international segment of the business is lower by $48 million from year-ago levels as a result, but the good news is that overall operating income still managed to beat the company’s forecasts ($97m actual vs. $79m forecast).

Netflix will also have to take note of the competition. HBO launched its new online streaming service, “HBO Now” on April 7, 2015, offering consumers access to popular shows like Game of Thrones for $15 per month.

The CEO, Reed Hastings, doesn’t see HBO as a competitor though, remarking in his most recent letter to shareholders that Netflix and HBO are not substitutes for another.

Gunning for TV

Hastings reminded everyone that Netflix is not threatened by HBO. HBO and Netflix’s streaming services are, after all, united in attacking the foundations of the TV Industrial Complex and its archaic take-it or leave-it bundling strategies.

HBO Now, Netflix and Hulu are all part of the rise of “Internet TV” – a movement that Hastings is hoping will replace “linear TV”. The gamble is that Internet TV is the way people will consume entertainment in the future, freeing people from the chains of expensive TV packages where you end up buying 400 channels to get the one you want. There are an estimated 115 million households with TVs in the U.S. and Netflix is hoping more and more of them will abandon traditional television for Internet TV.

Internet TV is primed to usurp regular TV, or “linear TV”, for a number of reasons:

  1. More and more Smart TVs are being sold; with Wi-Fi capability these TVs make watching streaming shows very accessible.

  2. People are watching streaming content everywhere, on their phones, tablets, computers and TVs.

  3. The Internet is getting more reliable without sacrificing speed.

Great Strategy

Netflix is pushing ahead, placing great emphasis on its original content. In addition to extremely popular series like House of Cards and Orange is the New Black, Netflix has plans to produce three times as many hours of original programming in 2015 as it did last year. With 320 hours of exclusive original programming slated for 2015, the company is not short on ideas. The release of Unbreakable Kimmy Schmidt, the new Tina Fey comedy, has been a success and is followed by Marvel’s Daredevil, the yet-to-debut Grace and Frankie, starring comedians Jane Fonda and Lily Tomlin, and many, many more.

The original programming differentiates Netflix. The company has to compete for people’s time and spending against regular TV, pay-per-view content, DVDs, other internet streaming services like Hulu, video games, books and others. By positioning themselves as a producer of entertainment, not just a provider the company is able to build and market their brand much more effectively.

Can Netflix Hit $900?

Hard to say for certain, but the trends are certainly in place to propel Netflix to further riches. Netflix is the market leader and for now it seems their growth is unstoppable. Member acquisition is actually accelerating while engagement is at all-time highs; consider that Netflix subscribers streamed 10 billion hours of content in the first quarter of 2015!

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What will likely happen is that Netflix share price will go down…just not in the way you think. Netflix is seeking approval for an increase in the number of shares offered, and if their proposed stock split goes ahead then the share price will decrease. A stock split increases the number of shares in a public company and the price is adjusted such that the market capitalization before and after the split remains unchanged.

For example if Netflix had 100 shares at $500 each, then the market cap is $50,000. If there is a 2-for-1 stock split, then there would suddenly be 200 shares, each worth $250, at a market cap of $50,000. This is a strategy that Netflix will likely use to make the company more accessible to investors and attract even more money.

If the stock split happens, expect more money to flow into the stock -potentially driving the share price higher.

The online TV revolution is here and the future looks rosy for Netflix!

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