3 Reasons Why Netflix Will Close Higher This Week
Sep 26th 2011 9:53AM
Updated Sep 26th 2011 9:54AM
"Moving forward step by step, despite the foot with the bullet hole..." CEO Reed Hastings wrote on Facebook last night, linking to a New York Times article on the deal.
The popular family-friendly fare won't pop up on the streaming service anytime soon. The new deal doesn't kick in until 2013, and many of the computer animation studio's blockbusters won't be available right away. However, it's just one encouraging sign for a company that has seen its share price shrink 58% since peaking just shy of $305 two months ago.
I have been hard on Netflix in that time, and rightfully so. However, now that even Hastings is aware of the bullet hole, maybe a tourniquet is in order to stop the bleeding.
Let's go over a few of the reasons why I believe that Netflix is due for a bounce this week.
1. New streaming deals are coming
Netflix's world began to unravel three weeks ago, when Liberty Starz (NAS: LSTZA) revealed that it would not be renewing its streaming deal with the video rental giant.
This was a pretty big blow. Unlike the low profile of Starz as a premium movie channel, the company actually holds the streaming rights for a couple of very important studios. Netflix will have a void to fill when this multi-year deal expires in February. Thankfully, Netflix is on the case.
It announced a renewed and expanded deal with Discovery Communications (NAS: DISCA) last Wednesday. Is there a lot of demand for greater breadth on streaming content from Discovery, TLC, and Animal Planet? Well, this is an arms race, and every piece of incremental content helps.
The new DreamWorks Animation deal won't come cheap. Analysts estimate that it may cost $30 million per film. That's a lot of dough for a future library, but it's easy to see why DreamWorks Animation is excited about it. This is the kind of hassle-free revenue that will help offset any box office or retail shortcomings.
Strategically speaking, it was a good thing that Netflix refused to give Starz a blank check. There's no way that Starz will ever be able to make that kind of money elsewhere, and now rival studios know that Netflix will pay -- but not overpay -- for quality content.
2. The competition isn't as ready as you think
Investors were hanging on DISH Network's (NAS: DISH) "stream come true" event on Friday, figuring that Netflix was bumping up against another meaty rival.
It was pitiful. Instead of a full-blown streaming service, DISH Network is simply offering the Blockbuster Movie Pass service of mail- and store-based DVD and video game exchanges for $10 a month. It will also offer a limited digital catalog -- 3,000 titles deep at the moment -- that can be streamed through a limited number of TV setups. Slim pickings on the "stream come true" end and forcing users to pay hefty DISH monthly bills on top of the $10 price will be a deal-breaker for most couch potatoes.
Since Coinstar's (NAS: CSTR) Redbox remains woefully silent on the digital front, we're back down to Amazon.com (NAS: AMZN) as the only feasibly priced threat to Netflix's digital smorgasbord model. Sadly for the leading online retailer, it also isn't where it needs to be to compete. Amazon's video library -- which at 11,000 largely dated titles isn't going to be the solution for customers bored by Netflix's tens of thousands of streaming options -- is weak, and it's still not an intuitive service to use across popular web-tethered devices. Sure, Amazon did sign another deal today with FOX which gives its service a hit TV show in 24, but most of the titles called out in the press release fail to inspire.
As we get closer to the end of the month -- and fence-straddling Netflix subscribers begin surveying the scene -- they'll realize that there isn't a pure replacement that isn't sorely lacking in one regard or the other.
3. Netflix is finally cheap
Netflix shaves its third-quarter subscriber target by 4%, analysts slash their profit targets by even less, and the stock loses more than half of its value since its summertime peak?
There's something wrong here, and it smells like an opportunity.
Netflix is now trading for 29 times this year's projected profitability and less than 20 times next year's target. I should also point out that even though Wall Street has talked down Netflix's prospects in recent weeks, bottom-line estimates are actually higher for 2011 and 2012 than they were three months ago.
There are plenty of smart investors, including many of my fellow Fools, that don't see it that way. They think that Netflix peaked at 24.6 million domestic subscribers three months ago, and give little value to the 43 new countries that Netflix entered earlier this month.
In my mind, there's a greater chance that the next wave of news will be good -- not bad. Open up the closet. Every shoe has fallen. There's a stronger likelihood that Netflix will announce that it will offer new releases as digital piecemeal rentals or announce a needle-moving content deal than it will (once again) rain on its shareholders.
I am fully aware that Netflix has done itself more harm than good since it hosed down its guidance. We may very well be looking at less than 24 million domestic subscribers by the end of the month. Alas, that's perhaps the last stiletto dangling dangerously from the top rack.
However, I don't have to rent Hall Pass to know that many participants among the millions of Netflix subscribers will come to realize how good they have it at home. They'll realize how easy it is for that overnight Redbox rental to linger around for a few extra buck-draining days. They'll see that there is no "Amazon" or "Blockbuster" button on their Blu-ray remotes. They'll realize that $10 on top of a stiff satellite television bill is no bargain at all. Qwikster jokes will dry up. I promise.
It's not as bad as you think for Netflix.
If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.
At the time this article was published Motley Fool newsletter services have recommended buying shares of DreamWorks Animation, Netflix, and Amazon.com, as well as creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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