... and DVD Dollars

12/16/2005 12:00 am EST


Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

I admit to being favorably disposed to this recommendation - not because I own the stock, but because I chose to buy the Netflix service as holiday gifts for friends and family. Here, Jim Collins as well as Beth Gaston Moon offer their outlooks on the DVD rental company.

"Netflix (NFLX NASDAQ) is the world’s largest online movie rental service, providing more than three and a half million subscribers access to over 50,000 DVD titles," notes Jim Collins in OTC Insight. "Customers receive movies through the mail and are able to keep them as long as they choose. Under its most popular program, subscribers pay $17.99 a month and rent as many DVDs as they want, keeping three out at a time. There are no due dates, late fees, and no shipping fees. With regional shipping centers throughout the country, Netflix can reach more than 90% of its subscribers with generally one business-day delivery.

"In September, the firm updated its long-term subscriber and profit goals. Netflix announced that it expects to reach five million subscribers during 2006, a full year ahead of its original goal. Its long-term target is reaching 20 million subscribers within 5 to 7 years. For the latest quarter, Netflix reported income of $0.16 per share, down from $0.35; the decline was due to more aggressive marketing to attract new subscribers. Revenues, however, rose 23% to $174 million. The strong performance was attributed to a 61% year-over-year increase in subscribers. The stock set a 52-week high in November before pulling back. NFLX receives a B+ rating for accumulation and distribution and has a relative strength of 98."

Adds Beth Gaston Moon, analyst with Schaeffer Investment Research, "Netflix, the rent-DVDs-from-the-comfort-of-your-own-couch innovator, continues to impress from an ‘Expectational Analysis’ standpoint, which is our strategy of combining a stock’s technical and fundamental situation with its sentiment outlook. Even a recent brokerage downgrade wasn't enough to deter the shares, which turned lower but quickly showed signs of recovery. NFLX has been in winning mode since late March, using the support of its 10-week and 20-week moving averages. What's more, these moving averages have forged a 'bullish crossover', a positive technical sign. One caveat is the 30 level, which stands to challenge the shares, but a solid move through this mark could spur a run to new multi-year highs.

"On the sentiment front, Netflix continues to battle skepticism, which is encouraging from a contrarian perspective. More than 35% of the float is sold short, amounting to a short-interest ratio of 7.3 days to cover. The possibility of a short-covering rally is solid. What's more, seven of the 11 analysts following Netflix name it a ‘hold’ or worse, leaving room for upgrades on any good news or continued upside from the stock. The combination of hefty short interest, strong price action, and unappreciative analysts results in a Schaeffer's Equity Scorecard rating of 8 out of 10, indicating that the easiest path for the shares leads higher still."

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