Small-Cap Spotlight: Netflix Not Worth Watching

So now we have a company in a price war whose growth model is dependent on online video, which does not seem to be a short-term reality. The reduction in marketing expenses cannot be sustained unless Netflix continues to lower prices, which is not something investors want to see from a growth company.

I would use the recent 50% jump in the stock to take some profits off the table. The company's strategy may work in the short term, but it will be difficult to sustain.

Kusick: Don't Get Suckered by Sentiment

To me, both Netflix and Blockbuster are classic sentiment plays. Both companies go through cycles in which results are poor relative to high analyst expectations, then surprise to the upside months later when expectations fall too low.

In this case, Blockbuster provides a clear road map for Netflix. In 2006, Blockbuster spent its first three quarters telling analysts it would have 2 million online subscribers by year's end. At the end of the second quarter, the company had added just 200,000 subscribers, yet kept telling investors that it was still targeting 2 million.

Following Blockbuster's weak second quarter, shares were languishing below $4 and it was assumed management was blowing smoke about its subscriber goals. Analysts spent the rest of the summer and early fall trimming estimates and lowering subscriber expectations.

Then the company effectively turned on the marketing spigot, rolling out its Total Access plan, and it announced in January that it hit a total of 2.2 million subscribers at year-end, surpassing the 2 million target. Shares rallied from below $4 in October to above $7 in March, as analysts adjusted their models upward, anticipating significantly better forward results based on the new-found growth of Blockbuster's online service.