4 Reasons to Be Bullish About Netflix

4 minute read

Few companies are better positioned to capitalize on the Internet video boom than Netflix, the erstwhile DVD rental business turned online streaming powerhouse.

That’s part of the reason why investors have pushed Netflix shares up more than 100% over the last year, although the stock is down about 20% over the last month amid broader weakness in the tech sector. A new study by Experian shows that Netflix is playing an important role in the still-nascent “cord-cutting” trend, in which users eschew cable TV service in favor of services like Netflix and Aereo.

On Monday, Netflix will report earnings results for the first three months of 2014, and Wall Street analysts are eager to see the extent to which the company’s original content—House of Cards, in particular—is helping to attract new subscribers.

“We believe the company should benefit from the launch and awareness around season 2 of House of Cards and continued improvements in content, as well as positive seasonality driven by more Internet-connected devices and colder weather,” Morgan Stanley technology analyst Doug Anmuth wrote in a note to clients.

Netflix’s stock price has historically been very volatile, and if the company fails to meet expectations Monday—analysts expect the company to announce that it has added 2.25 million new subscribers—its shares could take a tumble. But over the long term, there are several reasons to be optimistic about Netflix’s prospects, according to a recent study by investment bank RBC Capital Markets. Here are four of them:

1. For the first time, Netflix has surpassed YouTube to become the leading online video site, according to the RBC Capital Markets survey, which asked 1,033 Internet users about their entertainment habits. (This is the 10th such survey conducted by RBC technology analyst Mark S. Mahaney since May 2011). Some 44% of respondents said they use Netflix to watch movies or TV shows—up from up from 37% one year ago—edging out YouTube, which came in at 43%.

2. Most Netflix customers are happy with the service, according to the survey. Overall Netflix satisfaction levels are now at record levels, with 66% of current subscribers responding that they are either “extremely satisfied” or “very satisfied” with their service, up from 62% one year ago.

3. Netflix subscribers are increasingly less likely to leave the service, the survey found, with 69% of current subscribers “not at all likely” to cancel their subscriptions in the next three months, up from 66% one year ago. “We note that this is the highest level we have tracked in more than two years,” Mahaney wrote.

4. There is increasing evidence that Netflix’s original content is keeping customers subscribed to the service by acting as “an anticipatory anti-churn factor,” as Mahaney describes it. Some 47% of Netflix subscribers said that original content was “extremely important,” “quite important,” or “moderately important,” when deciding about whether to remain a subscriber, up from 42% in November 2013.

Taken together, these trends provide a reason to be optimistic about Netflix’s prospects. And despite the dramatic increase in the Netflix’s stock price over the last year, Mahaney argues that the company remains undervalued. “We continue to believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently factored into its stock price,” he wrote in a recent note to clients.

Wall Street analysts will also be eager to hear more details from Netflix executives about the company’s controversial agreement to pay Comcast for a direct connection to the nation’s largest broadband provider. Although Netflix CEO Reed Hastings has expressed his displeasure about the deal, there is clear evidence that the interconnection pact is substantially boosting Netflix performance for Comcast subscribers, which should improve customer satisfaction even further.

“We believe it is likely that Netflix is having similar conversations concerning interconnection agreements with other broadband providers,” Mahaney wrote, “and we view the Comcast deal as incrementally positive for Netflix in the long term, as it should provide a better user experience for the company’s streaming subs.”

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