AOL Money & Finance

Netflix delivers a Q2 that proves critics wrong

Posted Jul 24th 2009 9:00AM by Steven MallasSteven Mallas RSS Feed
Filed under: Earnings reports, Netflix, Inc. (NFLX), Blockbuster Inc 'A' (BBI)

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Netflix (NASDAQ: NFLX) released its Q2 report on Thursday after the bell. You had to like what you saw. Revenues increased 21%. Total subscribers went up 26%. Growth in net subscribers on a year-over-year basis was impressive, as was the increase observed in the gross margin. Free cash flow was up. And now for the final piece of the performance puzzle: adjusted earnings per share increased 29% to 58 cents. Very good.

Consumers have really taken to the Netflix model. They love getting DVDs by mail. And Netflix has really done a job on its major competitor, Blockbuster (NYSE: BBI). No doubt about it, I'm sure a lot of Blockbuster shareholders are wishing they were invested in Netflix.

How long can the good times last? Netflix also did pretty darn well in Q1. Plus, you have to wonder about the company's future. Although Netflix is attempting to prepare for the day when digital distribution overtakes physical media, will the company truly be up to the task? It sure looks like it, though you never know how smart a management team actually is until it faces a disruptive challenge.

Another thing to consider: Redbox. Redbox is a very convenient rental kiosk, although Netflix still holds an advantage over it. Sure, you might be able to rent movies immediately for a very low price in a supermarket, but since Redbox's model is new-release driven, the depth of selection is an unattractive element.

So, let me ask again: how long can the good times last? They'll likely last a long time, because whatever disruptions Netflix will have to eventually put up with in the future, they haven't arrived yet and the fundamentals of the business continue to be strong. That doesn't mean that you shouldn't take some profits. Netflix was down in yesterday's after-hours session, although they were only down by roughly 1%. What does that say to me? Maybe this: Netflix may take a pause, but it will continue its run higher after the break. I'd wait to see how the quality of the price action shapes up over the next several trading sessions before putting money down on Netflix. Could be the wrong strategy considering how strong the stock has been, but that's what I'd be more comfortable doing.

Disclosure: I don't own any company mentioned; positions can change without notice.

Tags: BBI, blockbuster, dvd rentals, DvdRentals, featured, home video, HomeVideo, netflix, NFLX, Redbox

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Last updated: November 27, 2009: 10:25 AM

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