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How Netflix, Inc. (NFLX) Beat Out Best Buy Co., Inc. (BBY) to Lead the S&P Higher

So far this year, the stock market has raced higher without nearly any interruption. Less than three months into 2013, the S&P 500 (INDEXSP:.INX) is already up more than 9% year to date, and that excludes the additional returns that dividends have provided.

But some stocks have produced much better returns than the overall S&P. In particular, Netflix, Inc. (NASDAQ:NFLX) and Best Buy Co., Inc. (NYSE:BBY) are battling it out for top honors among S&P 500 stocks, and Netflix currently maintains a small lead, with a 96% return versus Best Buy’s 94%. Let’s look at what these companies have done to generate those gains and whether they can sustain their strong returns throughout the rest of 2013 and beyond.

How Netflix soared higher
Part of the reason Netflix has risen as much as it has is that it sank so far in 2012. Following its initial miscues in separating its streaming and DVD businesses back in 2011, Netflix shares suffered throughout most of last year as concerns about the potential for rising content costs and the entry of other players into the streaming market weighed on investor sentiment.

Netflix’s January earnings report put a stop to the concerns that skeptics had about growth. Producing a profit rather than an expected loss, Netflix has managed to hold on to more of its DVD customers than the company itself had expected, and subscriber counts have continued to rise sharply even in the mature domestic market. Combined with the huge potential from its recent international expansions, Netflix, Inc. (NASDAQ:NFLX) has returned to the high-growth path that shareholders had thought was gone forever, and investors have bid the stock back up to the stratospheric valuations it had two years ago.

Not everyone agrees that Netflix deserves its current valuation, though. With competition from (NASDAQ:AMZN) , Netflix will have to deal with the margin-killing power of Amazon’s overall business strategy, which generally involves sacrificing current profits in the pursuit of long-term market-share dominance. Although it has so far failed to make a big dent in Netflix’s business, Amazon is slowly starting to amass a collection of content that could eventually make things difficult for Netflix.

For now, though, Netflix, Inc. (NASDAQ:NFLX) is riding the wave of good news. It will have to sustain its faster pace of growth to advance from here, but plenty of shareholders still remember the good old days when shares were priced at $300 — more than 60% higher than their current levels.

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