Friday, December 27, 2013

Five Reasons Why The Netflix Juggernaut Could Continue to Roll

Netflix (Nasdaq:NFLX) has emerged as one of Wall Street's "It" stocks.

The Los Gatos, Calif.-based company's shares have climbed 251% so far this year and 417% in the past year, compared with 19% and 17%, respectively, for the benchmark Standard & Poor's 500 Index.

Netflix has achieved something that every consumer-driven company wants: a strong and favorable buzz in the marketplace. Steve Jobs' Apple (Nasdaq:AAPL) sure had a buzz. So did Mark Zuckerberg's Facebook (Nasdaq:FB), pre-IPO, anyway. The buzz means that the public loves the company's product and the company has taken its place in the annals of corporate culture. The bigger the buzz, the more consumers jump on the bandwagon. Netflix got it via producing a couple of original series, "House of Cards" and "Orange is the New Black," and by coming back from its bad-buzz past of 2011 when it hiked prices, asking customers to spend more of their discretionary income on the company's wares.

The key question: Can Netflix keep up the momentum?

Thanks to these five factors, the answer could well be yes.

Social Media

It is no coincidence that Netflix chief Reed Hastings has been a savvy proponent of Facebook (Nasdaq:FB) -- after all, Hastings sits on Mark Zuckerberg's board. In July 2012, Hastings communicated on Facebook an important milestone, which helped boost Netflix' stock: For the first time, in the previous month of June, Netflix' monthly-viewing had surpassed 1 billion hours.

Social-media experts have applauded Hastings for taking the lead on using Facebook to broaden his company's communications skills while increasing its brand awareness.

In a recent article on LinkedIn, Clara Shih, the chief executive of Hearsay Media and the author of "The Facebook Era," said that "It's not surprising to see this innovation in investor relations coming from a technology company. I applaud Netflix for taking what could have been viewed as an accidental social media post -- a mistake! -- last year, and using it now as a launch pad for bringing every aspect of their corporate communications into the social era."

Last July, Netflix continued its smart use of social media when it reported its second quarter results by a live-streamed video question/answer event. CEO Reed Hastings, CFO David Wells and Chief Content Officer Ted Sarandos were asked questions by CNBC reporter Julia Boorstin and BTIG analyst Rich Greenfield.

Hastings said the structure was intended as an informal "fireside chat," in contrast with the usual, structured quarterly audio conference call with Wall Street securities analysts.

Inroads Against Premium Channels

Granted, HBO's "Game of Thrones," for instance, has a larger audience than anything on Netflix, but Netflix's original programs have performed well against the likes of HBO's "Boardwalk Empire" and are comparable to Showtime's highly praised series "Homeland" and Starz' "Spartacus."

Netflix has shrewdly elbowed its way into Hollywood. Netflix was founded as a company that delivered the DVDs of your favorite movies and TV shows. Then, it went on to streaming. Now it is taking the next evolutionary step as a creator of content.

Favorable Un-Subscriber Figures

In the United States, consumers have been executing fewer desktop searches for the expression "Netflix unsubscribe." Interestingly, search volumes for the term had increased year to year through the third quarter of last year, before a reduction in the fourth quarter, Janney Capital analyst Tony Wible pointed out. This may seem like a point worthy of the "inside-baseball" designation, but it also underlines the company's progress in the way that consumers are viewing Netflix.

That Buzz Factor

"Orange Is the New Black," Netflix's drama-comedy depicting a woman's life in prison after she gets incarcerated for drug dealing, has continued Netflix's success in original programming, following "House of Cards." Netflix is gaining eyeballs and critical acclaim by competing with (and, arguably, outwitting) the major cable channels at coming up with edgy, quirky plot lines packed with excellent television writing and vivid, intriguing characters.

"Orange Is the New Black" racked up more viewers and hours watched in its first week, last July, than either of Netflix's other well publicized offerings, "House of Cards" or "Arrested Development," All Things D noted.

The company is establishing a serious brand in this crucial area of original programming and can ultimately draw such benefits as selling syndication rights in the U.S. and abroad for these shows, controlling production costs and keeping the winning streak going by continuing to attract prominent Hollywood talent among actors, directors, writers and producers. That means more hit programs.


As a result of Netflix's success, it has achieved that elusive quality of gravitas.

Hollywood is littered with the deb! ris of TV shows that turned off viewers after an initial burst of terrific critical reviews and substantial ratings prowess. One way to achieve staying power is to gain the accolades of respected industry figures.

When "Breaking Bad" producer Vince Gilligan accepted the Emmy a few weeks ago for Best Drama -- representing the pinnacle of his career to date -- he took pains to thank and acknowledge Netflix' contribution to his show's success. "I think Netflix kept us on the air," he said. "Not only are we standing up here (with the Emmy), I don't think our show would have even lasted beyond season two. It's a new era in television, and we've been very fortunate to reap the benefits."

Bottom Line

In the past two years, Netflix has shaken up its image on Wall Street and Main Street alike by gaining both gravitas and a buzz. It showed itself to be a company capable of innovation -- and continuous innovation leads to sustained growth.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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