Can Netflix Finally Get Some Respect?

Can Netflix Finally Get Some Respect?

REUTERS/Mike Cassese

The best-performing stock among the S&P 500 so far this year, hands down, has been Netflix (NASDAQ: NFLX) – yes, Netflix, which not so long ago was the Company America Loved to Hate. The stock gained 104 percent in the first quarter of 2013, and shares now trade above $180, way up from a 52-week low below $53 a share. Is it time to give CEO Reed Hastings and Co. their due and conclude that Netflix has turned it around?

Or, do you continue to remain a naysayer about a company that, like the beloved comedian Rodney Dangerfield, just can't get no respect?

Netflix has long been a lightning rod in the investment community. Many customers still resent it for arrogantly raising its prices in 2011 even though the nation was in the grip of a recession and citizens were widely cutting back on their discretionary expenses. Hastings apologized for the communications blunder and admitted he “slid into arrogance,” but even the apology was met with an angry backlash. The company, to some customers, could do no right.

Netflix's stock tumbled in the past few years as Wall Street's stock-pickers fretted that it would flop overseas, that its DVD business would die off and that intensified competition for content rights from Hollywood studios would force Netflix to increase its expenses. The word was that some content providers wanted to cut Netflix completely out of the process as a middleman between the content providers and the public. Why should, for instance, customers of Time Warner (NYSE: TWX), which owns HBO, want to pay Netflix a fee when they could view hit shows such as "Game of Thrones" or "Girls," not to mention older classics like "The Sopranos" and "Curb Your Enthusiasm," for free through HBO Go ("It's HBO Anywhere," the cable network's promotions proclaim persuasively).

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But Netflix executives believed, all along, that their loyal customer base was the company's ace in the hole. Its core of most enthusiastic subscribers, who love Netflix's  streaming and DVD-rental offerings, believe the company has made people's lives easier and deserves a lot of credit for coming up with a better way for people to enjoy movies and television programs at home. Yes, the entertainment mavens could go elsewhere, but Netflix has made a push to keep them, too, by launching its own high-profile, big-budget programming push. “House of Cards,” the original series starring Kevin Spacey, premiered on the service in February. Suddenly, Netflix was being hailed for revolutionizing television – not just be developing its own programming, but also by using mountains of data it has about its users to come up with a hit, and by making all 13 episodes available at once. Next up: Netflix announced a sci-fi series due next year from the Wachowskis, the siblings behind “The Matrix” trilogy.

If this is the future, why should users want to abandon Netflix? They like the company's convenience, its service record and, hey, the summer-of-2011 price increase wasn't actually that bad for them. Netflix was proven correct about that.

Giving users more reasons to stay has given investors reason to get excited. Shares of Netflix have trounced the S&P 500, up 59 percent over the past 12 months compared to 11 percent for the index. The S&P has jumped 10 percent this year, but Netflix has trounced it by roughly 10 times. Not too shabby.

As noted last month: "The company last week blew earnings expectations out of the water, and new research shows the number of U.S. subscribers is up 20 percent from a year ago. Still, just one-quarter of domestic households subscribe to Netflix, pointing to a vast untapped market."
The numbers don't lie. But there are respected folks on Wall Street who still aren't buying in. Should we call them plain old stubborn or do they know something that the rest of the market hasn't quite figured out yet?

Michael Pachter, the securities analyst and a partner with Wedbush Securities, represents the skeptics – and he isn't shy about speaking his mind. "This is a worse company today than it was a couple of years ago,” Pachter said on CNBC recently. “They have destroyed their DVD business, which is the source of three-quarters of their operating profit. They are chasing windmills overseas and their content owners are never going to let them make money over there."

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For now, Netflix remains the great parlor game of the media industry. Will the stock price continue to go up like a balloon? Or will the bears, like Pachter, puncture a hole in it and send the shares descending? Will competitors like Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL) or Google’s (NASDAQ: GOOG) YouTube ultimately take away any hard-fought gains?

Maybe the ultimate question here is: When will Netflix get some respect?