The One That is Getting Away - Netflix (NFLX)

Nov 29, 2010 -

Not the best way to start off this series of "Successful Unknown Companies", but I could not resist doing an article on Netflix (NFLX). Probably about a third of my earnings this year has come from NFLX.

This company basically took out Blockbuster.  Twenty five years of glory and now its been replaced by Netflix (thirteen years and counting). With more than twelve million subscribers, it is the world's largest subscription service streaming movies and TV episodes. For one reason or another the stock has been going bonkers lately. I can think of a couple reasons why this might be the case. About a week ago, it raised its subscription fees a dollar per month. Furthermore it announced that it would be providing a streaming-only subscription.

Call me crazy, but that sounds like cannibalization. Online streaming will take away from DVD subscription packages. However, I believe this is the right thing to do as the world is definitely moving away from DVDs and more focus has been placed on the Web. Amazon and Hulu are a couple players already in the market. Though I'd argue Amazon's streaming content is limited. Firms that provide streaming web content have entered into agreements with studios to provide content weeks after the release of the DVD. Evidently, studios DVD sales are declining and this is namely due to content being streamed online. If we bring this full circle, you can understand why it makes sense that the studios are limiting and delaying the release of content to streaming media providers.

In late November, NFLX gapped up approximately $10. Since then it has continued to climb hitting $200. In the last three months and six months its been up approximately $58% and 80% respectively. Since inception it has been up over 2000%. How insane is that? How is it possible that a service that simply provides streaming media and DVDs suddenly have a market value past $10.4 billion?

I'd have to say that their competitive advantage is branding. It is highly recognized across the nation. A recent survey conducted by an independent party determined that over 90% of Netflix subscribers would recommend Netflix to a friend.  Blockbuster had tried to retain its market share by providing DVDs by mail, but Netflix's branding was far superior and eventually over took Blockbuster. This is despite the fact that Blockbuster also had brick and mortar operations across the nation.

How do you get to the point where your branding is far more superior compared to your competitors? You build that brand/reputation through providing convenience, fast delivery, and variety of selections. Since entering the Web to compete against YouTube, Amazon, and other streaming content providers, Netflix has increased its library by an estimated twenty six folds!

Sadly, like all things, I believe at some point this will come to an end. The stock will drop and the hype will drown with it. Until then it is best to ride the wave and catch as much of it as possible. Beware as this seemingly one trick pony could flip out at any moment. Still it looks like a fantastic party right now.

The writer does not own NFLX. The information provided on this site is not advice to buy, sell, hold, trade, or invest in any securities. I am not a financial professional. Do your own research before acting on any information provided on this site.

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