Technology > Tech Biz
Netflix: feel-good hit
The stock price may be unjustifiable, but Netflix seems to be doing just about everything right.
January 26, 2004: 3:34 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - For a moment last week, I thought I had traveled back in time to 1999. The reason? Netflix.

I glanced at its stock price: up 18 percent on Thursday, and boasting a trailing price/earnings ratio of -- gasp -- 435.

I had a hard time reaching anyone at the company for comment on Thursday because most of the organization had been flown to the Sundance Film Festival.

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"Next thing you know, they'll be placing orders for $1,000 Aeron chairs," laughs Rich Ingrassia, a senior research analyst at Roth Capital Partners.

A closer look at Netflix's numbers explains the share price somewhat: 80 percent fourth-quarter revenue growth from a year ago, record overall revenue, a 41 percent increase in new subscribers from a year earlier (for a total of nearly 1.5 million subscribers), 95 percent market share, and a churn rate that dipped for the first time below 5 percent.

Oh, and the company also announced a stock split.

I guess you can't blame them for jetting off to Sundance after a quarter like that. But is Netflix really a $70-plus stock?

It's too rich for my blood, and when you look at consensus earnings estimates from analysts covering the stock, their high target price is about $58.

Ingrassia suggests that one of the reasons the stock shot up so much was that "the short sellers threw in the towel." It's hard to recommend a stock that's trading at these nosebleed levels, but it's also hard to fault Netflix.

It's priced for perfection (and then some), but it's also executing pretty flawlessly right now.

Good developments

Netflix CEO Reed Hastings made two announcements in his earnings call last week that intrigued me.

First, he mentioned his company's international expansion plans, specifically moves into the United Kingdom and Canada sometime in 2005.

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"Netflix has already gone as far as it can from a distribution standpoint in the U.S.," says Gale Daikoku, research director at GartnerG2. "How else can Netflix grow? Going international makes sense."

"They're both good DVD markets," Hastings told me later from Park City, Utah, noting that for a while, "international sales will be small [compared with] the revenue in the U.S."

Second, the company intends to allow subscribers to download movies from its Web site, so people won't have to wait for them to arrive in the mail.

However, a couple of notable companies already offer that service: Movielink and CinemaNow. It's doubtful that Netflix will obtain better licensing deals than Movielink, a joint venture of five major movie studios. What's more, Movielink has been aggressive in signing big deals, inking one with AOL just last week.

Netflix says it won't offer the service until 2005 -- when it has even more ground to make up. As such, "downloads won't have any significant revenue impact for Netflix" in the short term after it launches the service, Daikoku says.

Still, it's good to see Netflix reaching out into new markets. Fifteen months after Blockbuster and Wal-Mart entered its space with supposed Netflix-killer products, Netflix is still the king of the hill.

And I'm eating crow for the column I wrote back then titled "Netflix: A Division of Wal-Mart?"

Right now I can't recommend the stock because of its wild valuation, but I also can't find fault with the way the company is proceeding.

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