Showtime for Netflix?

As part of ongoing portfolio evaluation process, I often ask myself a question: Which company has the highest potential in the next decade?  The answer may surprise you: I think it is Netflix.

Netflix stock had a wild ride over the last couple of years.  After reaching a high of around $300 in the summer of 2011, it fell all the way to $60 as a result of several company-specific missteps, most notably the Qwikster fiasco.  As of this writing, however, it has recovered all these losses and then some, and once again Netflix trades at all time high.  So what are opportunities and pitfalls for Netflix going forward?

Let’s start with the positives:

– International presence.  Today, Netflix has about 10 million international customers compared to 30 million domestic, where it derives most of its revenue. But it will not always be that way.  An established internet-based company, such as Amazon, can be expected to derive up to 80% of revenues from overseas.  Even after recent expansion, Netflix international presence is still minuscule, and it has an enormous potential ahead overseas.

– Revenue.  Netflix hasn’t raised prices since above-mentioned Qwikster debacle, but it won’t charge $7.99 per month forever.  When it raises prices by a buck or two, I don’t think many subscribers will defect.  And the increase will flow directly to profits, potentially doubling or tripling them overnight.

– Stock price.  Psychologically, it may be difficult to buy a stock that rose 5x during the previous year.  However, if, as long-term investors, we overlook the recent stock gyrations, Netflix trades just a bit higher than it was in summer of 2011, more than two years ago.

And here are some challenges:

– While international operations are becoming more efficient, Netflix is still not profitable overseas.

– The internet based TV is still in its infancy, and Netflix model could be disrupted by a yet unknown entrant in the industry.

– Stock valuation is quite high, on the level of other “momentum” stocks such as LinkedIn, Zillow, and Tesla.

Without a doubt, Netflix stock is risky, and yet it presents a very compelling growth potential over the next several years.