Netflix Finds Value In Contrarian Approach

Most Netflix subscribers that receive DVDs by mail also have free access to the Internet streams, whether it be to their computer or a number of supported devices, including Microsoft's Xbox 360, Roku set-top box, or Samsung Blu-ray DVD player. The free "Watch Instantly" program gives Netflix a slight advantage over paid streaming products from Apple and Amazon.

"Streaming is going to be the future," Swasey said. "But in the mean time, we have a subscriber base of 10 million that are getting DVDs from us. We revolutionized the way Americans rent movies about 10 years ago, and now we're revolutionizing again by doing the streaming. It is really exciting to watch this unfold."

Analysts Still Not Buying It

Netflix's financial highlights sparkle, as the company has doubled 2005's revenue total to $1.36 billion in 2008. Net income has also doubled over that same amount of time to $83 million, while free cash flow has jumped from $24.3 million in 2005 to $94.7 million last year.

Of course, not every analyst is sold on Netflix. While downgrading the stock to sell, Janney Montgomery Scott analyst Tony Wimble recently said Netflix could be hurt if the economy incrementally deteriorates, if streaming investments are dilutive, if kiosks like Redbox gain more momentum, and if Blockbuster is stronger than Netflix shareholders currently envision.

Meanwhile, Bank of America analyst Nat Schindler wrote in a February research note that an acceleration in subscribers has not been as profitable for Netflix, prompting him to give the stock an underperform rating. Needham analyst Charlie Wolf also downgraded shares to underperform last month, arguing that "Netflix's venture into the digital distribution of video could prove to be less profitable than its by-mail DVD distribution business."