What's next for Netflix?

Even in the age of video downloads, the DVD-by-mail giant is signing up customers, and its stock is soaring. But challenges lie ahead.

By Yuval Rosenberg, Fortune contributor

(Fortune Magazine) -- Earlier this year Netflix CEO Reed Hastings popped the cork on a special bottle of bubbly - one that had been set aside to celebrate the company's signing up its five millionth subscriber.

Since that milestone, the gangbuster growth has continued en route to a projected 6.3 million subscribers by year-end. A surprisingly strong third-quarter earnings report helped rescue Netflix stock from a long slide and sent it soaring more than 50 percent since late August.

netflix_hastings.03.jpg
The postman: The mail-order model is working for CEO Hastings.

And Hastings has set even more ambitious future goals. "Tripling over the next five to six years seems very doable," says the CEO, who aims to have 20 million subscribers as early as 2010, along with 50 percent annual profit growth for the next few years.

If it seems everything has been going according to script for Netflix (Charts), the company is still not assured of a Hollywood ending. While Hastings & Co. have succeeded thus far in fending off challenges from the likes of Blockbuster (Charts) and Wal-Mart (Charts), competition in the online movie business has only intensified in recent months.

Apple (Charts) and Amazon (Charts), for example, launched movie-download services in September, attracting buzz - and amplifying questions about the prospects for Netflix's DVD-by-mail service.

Hastings insists he won't cede the future to those new entrants. He'll unveil the company's strategy and timetable for downloads in January, and he says Netflix will invest some $40 million next year in building that service. That's up from less than $10 million this year but nevertheless "modest," Hastings admits, compared with the company's projected 2007 revenues of more than $1.3 billion.

One reason for that modesty: It is likely to take years for the nascent downloading market to erode Netflix's DVD-by-mail business. Hollywood has been extremely cautious about embracing downloads, and the services themselves face a host of hurdles.

"It's not like you're going to snap your fingers and tomorrow every movie ever made is going to be available for digital download," says Kevin Landis, chief investment officer at Firsthand Funds, which owns Netflix shares.

Even so, Netflix faces stiffening competition. Blockbuster, for example, recently sweetened its online offering, allowing subscribers to return DVDs received by mail at its stores - and get another free rental. And Netflix has been spending more to acquire new subscribers, while the average revenue per user continues to slide quarter to quarter.

Given that picture, a number of analysts are skeptical about whether shares can move much higher, at least in the near term. "It's not a cheap stock," says Ivan Feinseth, director of research at institutional brokerage Matrix USA. In other words, Netflix shares might not keep rising happily ever after.

____________________

Can Amazon take a bite out of Apple? Top of page

YOUR E-MAIL ALERTS
Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.