What’s going right for Netflix
It’s been a monumental few months for the video-streaming darling. The stock is up more than 124% since the beginning of the year and 113% year over year. With its latest earning report release, the stock jumped 24% on Tuesday. But stock fluctuations aren’t a good reason for buying a company’s stock, so let’s look at what Netflix, Inc. (NASDAQ:NFLX) is doing to create those gains.
This past quarter, Netflix increased U.S. subscribers by 2 million, bringing its total U.S. subscriber base to more than 29 million. Part of the subscriber increase is likely from its hugely popular original series House of Cards that aired a few months ago. The show brought in Hollywood director and producer David Fincher as well as actor Kevin Spacey. House of Cards received glowing critic reviews and a very warm welcome from Netflix customers.
Source: Netflix.
Following the success of the show, Netflix, Inc. (NASDAQ:NFLX) released a horror series called Hemlock Grove from director Eli Roth. More Netflix customers watched the new show in its first weekend than they did House of Cards. Keeping with the original content theme, next month the much-anticipated Arrested Development series will return to television via Netflix, and the company has already hired the Wachowski siblings (of The Matrix trilogy fame) to create a sci-fi series that will launch in 2014.
Despite its current success with the shows, Netflix’s premium original content is still a gamble that original content will create additional subscribers. House of Cards cost $100 million to create two seasons and Hemlock Grove costs $4 million per episode. But, so far, the original content has become an asset, mainly because Netflix, Inc. (NASDAQ:NFLX) has been able to create shows people are interested in watching.
This points to a larger theme among television viewers: relevant on-demand content. The old cable and satellite model is slowly breaking down as more users find the content through online streaming services. Netflix not only has a first-mover advantage in this space but also benefits from the mounds of viewing data it gathers from its users. The company can, and is, using that information to create shows that it knows will draw in the most subscribers — and keep current ones watching.
Why be wary
Netflix’s stock is currently trading at 165 times 2013 earnings per share. That’s not a typo — it’s really 165. Considering the average P/E ratio for the sector is about 14, the company’s stock is valued extremely high. For comparison’s sake, video-streaming competitor and online retail juggernaut Amazon.com, Inc. (NASDAQ:AMZN) sells for 182 times earnings. Reuters pointed out the other day that this makes Netflix the fourth most pricey stock on the S&P 500 right now, on a valuation basis.
