At the current $191 price, shares of Netflix (NFLX) are up 106% for 2013. At that pace the stock will end the year at $125,088 for a tasty 13,503% gain. Spoiler Alert!: it's not going to happen. To try to figure out alternative scenarios Breakout welcomed the Don of the Optionmonster.com family, Jon Najarian to explore the possibilities.
"I think this one is extended but it has managed a combination of squeezing shorts and a decent business model," Najarian says in the attached video. By business model Najarian isn't referring to the streaming business, where barriers to entry are stunningly low on the technology side. Netflix's real edge is in content and the price proposition for customers. For roughly the cost of an HBO or Showtime subscription consumers can get all of Netflix on-demand at all times.
The battle over content is where the real fight is. It's not clear if Netflix has deep enough pockets to bid against conglomerates for early rights to movies and TV shows. Instead the company is moving in another direction by branching into the production of original content.
So far the results have been mixed. "Lilyhammer," a fish-out-of-water tale staring Steven Van Zandt as a mobster exiled to Norway, was a flop. In contrast the recently aired series "House of Cards" staring Kevin Spacey was a huge critical success.
Creative success is difficult enough. Netflix also has to deal with economic realities associated with producing shows. "House of Cards" reportedly cost the company $100 million dollars just to secure the talent. Industry experts say cheapest shows run about $3.8 million per episode. In contrast "House of Cards" started with a $4.5 million budget and high profile director David Fincher "took it way above that."
Streaming and making movies and television shows are two cut throat businesses. The streets of Hollywood are littered with the discarded dreams of people who thought they could make a great television show. If Netflix misses a step Wall Street could be cruel.
Najarian notes that Netflix is back to the same number of subscribers it had when the stock was trading at $300 but the landscape has changed. The company is now facing competition from WalMart's (WMT) VUDU, Amazon (AMZN) and possibly Apple (AAPL).
With the endless uncertainties facing the industry an argument could be made to justify anything from $50 - $500 as a "fair value" for Netflix. The stock isn't going to end the year at $125,000 by New Year's Eve but we can be sure of little else. If only the company could generate content with such suspense.