Bullish on Netflix (NFLX)

By: January 26, 2022

History of Netflix

Back in 1997, Reed Hastings and Marc Randolph were co-workers at a software company named Pure Atria. Actually, Mr. Hastings was one of the founders of Pure Atria and Randolph was the Marketing Director. The two lived near Santa Cruz and carpooled together to Pure Atria’s headquarters in nearby Silicon Valley. During their commute over the Santa Cruz mountains, they talked about starting a company selling portable product over the internet. They were inspired by Amazon and how it was able to have an electric storefront on the internet and then ship purchased items to customers’ houses.

Netflix founders Reed Hastings and Marc Randolf. (Source: cbc.ca)

Together, they knew that the home entertainment market was growing and wanted to find a way to supply people with videos. Their business model would provide more relaxed terms than Blockbuster in how many videos customers held and how long they could hold onto them without being charged extra. However, they found VHS tapes too bulky and fragile to send through the mail system.

The new availability of DVDs changed everything. DVDs have no moving parts, so they can easily handle the jarring loads of the mail service. At the same time, they’re small and take up little warehouse space. They’re also lightweight and relatively inexpensive to mail.

Customers were mailed the movies they wanted and were allowed to hold on to them for extended periods without paying fines. Their new company, Netflix (NASDAQ: NFLX), developed sophisticated algorithms for anticipating what movies individual customers would want to watch and then made useful suggestions on what movies to receive next in the mail. It was the first online-DVD rental business.

A few years later, Netflix transitioned to a business model where customers paid a flat monthly fee in exchange for receiving an agreed upon number of DVDs. There were no late fees for delinquent returns. You just wouldn’t get new movies until the rented ones were returned. People really loved the service and the company flourished.

Netflix headquarters in Los Gatos, Silicon Valley, California. (Source: torontosun.com)

At the start of 2007, Netflix transitioned to streaming videos off the internet. In 2013, it followed in HBO’s footsteps and began creating its own content. Today, Netflix has 221.8 million subscribers worldwide. About 75 million of those are in the US. Netflix is available in every country on the globe apart from China, North Korea, and Syria.

The company’s revenues were a staggering $29.7 billion in 2021, but as happens in untapped markets like this one with low barriers to entry, competition shows up. Netflix has a growing list of competitors. The biggest are Roku (NASDAQ: ROKU), which was started by a former Netflix employee, Hulu (owned by Disney (NYSE: DIS), Comcast (NASDAQ: CMCSA), and Apple TV (owned by Apple (NASDAQ: AAPL).

Recent Developments at Netflix

Netflix is an undisputed pioneer in the field of video subscription services and streaming videos. However, it continues to innovate and expand. This past June, Netflix signed an agreement with Steven Spielberg’s Amblin Partners to release new films.

In July, it expanded its offerings to include mobile video games. Netflix began airing the South Korean drama called Squid Games in September. It pulled in 1.65 billion viewers in its first 28 days. In October, it launched Netflix Book Club, which is a series discussing new books and the process of adapting popular books to the big screen.

Watching Squid Games on Netflix will leave quite an impression on you. (Source: indianexpress.com)

Netflix opened its first Canadian headquarters in Toronto in April 2021.  That same month, Netflix opened offices in Rome, Istanbul, and Stockholm. Finally, Netflix released plans for their entire company to achieve net zero carbon emissions by the end of 2022.

Even though Netflix had tens of billions of dollars of revenue in 2021, and it beat analysts’ earnings estimates for the year, the stock lost about 40% of its value in the past two months. As the market has begun to rotate, it suddenly struck analysts that competition is eating into its business, and therefore, Wall Street punished the stock price. However, this isn’t shocking. This is the story of most companies that are market leaders, whether it’s drug companies, e-commerce companies, or entertainment companies. That’s why I see this as the ideal time to start loading up on NFLX stock.

Netflix may be down, but it’s still the best streaming provider on the market. Roku and Hulu aren’t really on the same level. Disney+ is struggling as well, and Disney has split its assets between two streaming services (Hulu and Disney+), which doesn’t really help either. Apple TV and Amazon’s (NASDAQ: AMZN) streaming service may be strong now, but they’re only side businesses for these giants.

Looking at the stock chart below, you can see that Netflix lost similar value at the start of the COVID 19 pandemic. Yet, its stock recovered nicely and went on to hit new highs. I expect the same thing to happen this time.  That’s why I’m bullish on NFLX here. This is a rare gift to buy NFLX at a discount!

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