Time to Revisit Netflix?

01/12/2012 9:30 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

The video content distributor is on the move to the upside again, but is this the time to follow the crowd, asks Timothy Lutts of Cabot Stock of the Month.

Netflix (NFLX) stock surged 11.4% last Wednesday, on big volume, as the company released some encouraging data about its customers’ embrace of video streaming, stating, "More than 20 million subscribers worldwide watched more than two billion hours of old TV shows and movies on devices with high-speed Internet connections during the final three months of last year."

On Thursday the stock paused, but on Friday it surged again, to its highest level in a month, on even greater volume. And that raises the question, "Is it time to get back into Netflix?"

After all, the stock is 72% off its highs of mid-2011 when it alienated customers by raising prices and then goofed (big-time) by announcing and then canceling a plan to separate its DVD-by-mail and video streaming business. Having lost $12 billion in valuation since then, Netflix looks cheap to a lot of investors; in fact some view it as a takeover target, citing Amazon (AMZN) and Yahoo (YHOO) as potential buyers.

They might be right. But I don’t advise investing in NFLX now, and here’s why.

As a rule of thumb, once a very popular hot stock (or sector) falls from favor, it takes far more than six months’ time to make it an attractive stock again. It usually takes two years or more…long enough for investors to forget about it. (Remember those solar stocks of 2007?)

Today, with Netflix’s decline still very fresh, too many people are looking for an opportunity to get back in, and the market is seldom so accommodating. In short, I think it’s plain early.

Furthermore, Netflix—which lost roughly 3 million customers last year—is expected to lose money in 2012 for the first time in a decade. That ruins the firm’s beautiful record of sales and earnings growth, and that might put a crimp in the spreadsheets of interested investors.

Finally, I believe founder and CEO Reed Hastings would resist any takeover attempt. Netflix is his baby, which he raised perfectly until this past year, and I believe there is more he wants to do with it.

Again, I could be wrong. But the odds are that money invested now will do better in lower-profile stocks with better risk-reward prospects.

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