Small-Cap Spotlight: Netflix Not Worth Watching

In this week's Small-Cap Spotlight, Frank Curzio and Larsen Kusick take a look at Netflix(NFLX Quote). Shares of the online movie rental company spiked over 50% in two months to $27, but does the stock have more room to grow, or is it time to take profits?

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Curzio: Flawed Business Plan

Back in July, shares of Netflix were under pressure after the company reported that its current subscriber base was 6.742 million -- or 55,000 lower than its previous quarter. This compared to the 800,000 net new subscribers that Blockbuster(BBI Quote), its chief competitor, added during its heavily promoted "Total Access" campaign.

At the time, Netflix reduced its third-quarter estimates sharply but said it would look to cut prices of its unlimited program by $1 in an effort to increase its attractiveness to new subscribers. Also, management said this move would result in less money spent on marketing.

Fast forward to the current quarter, which was reported on Oct. 22, and it seems these initiatives worked well. Netflix handily beat estimates and also raised its guidance. But I am not convinced that a plan that includes lower prices and reduced marketing is sustainable in an industry that seems to be near the top of its growth curve.

Its strategy leaves the door open for competitors to do the same. If this is the case, Netflix would probably have to raise its marketing costs to attract new subscribers in the long term.