Should Netflix, Inc. (NFLX) Bears Cover Their Shorts?

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Netflix, Inc. (NASDAQ:NFLX) reports tomorrow.

There’s a lot riding on the leading video service’s performance. The stock has nearly doubled since bottoming out this past summer, even though it would have to more than triple from here to hit its all-time highs established two summers ago.

Now, it’s easy to get excited.

Janney Montgomery Scott analyst Tony Wible — who has been a permabear on Netflix since 2007 — finally turned. Upgrading Netflix to a buy with a $129 price target is pretty significant for a Wall Street pro who’s been cemented on sell or hold for nearly six years.

Netflix, Inc. (NASDAQ:NFLX)Wible is encouraged by the company’s recent content deals and the way that content creators and cable providers are viewing Netflix. It has more than 25 million streaming subscribers in this country alone. It can no longer be ignored.

Wible also points out that the competitive threats just aren’t there.

Amazon.com, Inc. (NASDAQ:AMZN) has ramped up its content, but third-party reports indicate that Amazon Instant Video usage is just a sliver of Netflix’s engagement. Hulu has carved out an interesting niche in streaming television shows, but it hasn’t gotten in the way of Netflix’s growth. Coinstar, Inc. (NASDAQ:CSTR) may one day pose a threat with Redbox Instant, but the platform is still in beta and limited largely to movie titles that are already available through Netflix.

Red Dawn
Analysts are braced for a quarterly deficit out of Netflix, and rightfully so. The company itself warned of the red ink as content deals and international expansion more than offset domestic profitability.

No one expects Netflix to post a gain in its DVD-based accounts. CEO Reed Hastings revealed last year that sequential declines are expected there forever.

Yes, forever.

The optical disc is fading as a meduim. Blockbuster parent DISH Network Corp. (NASDAQ:DISH) announced over the holiday weekend that it would be closing another 300 stores. Some may argue that this move will benefit Netflix’s mail-based platform or Coinstar’s Redbox kiosks, but all this will do is ultimately push more customers into consuming video digitally.

Silver Linings Playbook
Another metric that will go in the wrong direction — beyond the bottom line and the shrinking number of disc-based accounts — is average revenue per user.

Netflix has no intention of moving away from its $7.99-a-month streaming plan, and the average revenue per member will continue to drift lower as folks on multi-disc plans continue to downgrade their service or kill off the optical disc deliveries entirely.

A popular knock on Netflix is that its streaming content lacks fresh titles. They’re too expensive, and studios are apprehensive about diluting the perceived value of new releases by making them part of a $7.99-a-month buffet.

If this was a game changer, Amazon would be doing far better here. It offers fresh digital releases as pay-per-view streams alongside its smaller unlimited smorgasbord. Redbox Instant would be generating more buzz by offering new content as a la carte digital streams and through its physical kiosk rentals.

Until we see Amazon or Redbox gain traction, there appears to be little reason for Netflix to follow the laggards. It would be a great way to boost the sluggish average-revenue-per-user metric, but for now it’s just not necessary.

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