The Contrarian Blog

Is This Just the Beginning of Netflix's Recovery?

by Andrea Kramer 2/1/2012 1:43 PM
Stocks quoted in this article:
Publication: "Harvard Business Review"
Publication title: "Netflix Will Rebound Faster than You Think"
Publication Date: 1/26/2012
Brief Summary:

After plummeting in late 2011 due to controversial price hikes, the shares of Netflix (NFLX) are once again on the rise. What's more, this upbeat article suggests the stock could pare its end-of-year losses at a quicker-than-expected pace, should the company flex some fundamental muscle.

"Two new sets of data show that criticism over Netflix's pricing moves has been overblown, and that the company is performing better than expected," note the authors. Along with the company's stronger-than-expected earnings report on Jan. 25, a recent study by CBS, The Nielsen Company, and The Cambridge Group found that, in a nutshell, "Netflix has only tapped half of the existing market for viewers with demand for streaming content, and that market is presumably growing."

However, as the authors note, "It's hard to imagine streaming is the final end game given that its 11% profit margins are a fraction of the legacy mail DVD's margins, which are nearly 5x higher." Nevertheless, considering NFLX's history as a "clear category creator with subscription-based DVDs by mail and again with subscription-based streaming," it might only take more of that same innovation to secure the firm's long-term viability. For instance, might the firm bring "its subscription-based media model to re-invent the local movie theater?"

Contrarian Takeaway:

Technically speaking, NFLX has tacked on roughly 73.5% in 2012, and is now attempting to establish a foothold atop the $120 region. This area acted as resistance during the final months of 2011, but could now switch roles to serve as support. What's more, the equity has outperformed the S&P 500 Index (SPX) by 71.7% during the past 40 sessions, underscoring its status as a recent broad-market standout.

From a sentiment standpoint, the equity's once-full bullish camp is still relatively depleted -- which could translate into a boon for the stock. According to Zacks, only four analysts currently rate NFLX a "buy" or better, compared to 26 offering up "hold" or worse suggestions. Likewise, Thomson Reuters pegs the average 12-month price target at $96.67, representing a discount to NFLX's current price.

As contrarians, there's nothing we like more than to see a fundamentally sound, uptrending equity surrounded by pessimism, which points to an ample supply of sideline cash to fuel additional gains. Should NFLX continue to recover both on and off the charts, a wave of upgrades and/or price-target boosts could lure even more buyers to the table.

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