Through it all, NFLX bulls called me every name in the book. In their eyes, I was a complete moron for predicting the pending implosion of a stock that did nothing but go up. Until it went down. And when NFLX went down, it went down hard.
All of a sudden, the media and analysts started regurgitating many of the themes that a few of us had been pounding for months, well before Netflix raised prices and attempted to separate its streaming and DVD businesses.
. Despite concerns to the contrary, the company returned to profitability in Q2 and anticipates staying there in Q3, though it did leave room in its guidance for a loss.
I can really only pull two negatives out of the report.
One, Netflix thinks the Olympics might hurt Q3 viewing and sign-ups. This could cause the company to miss full-year guidance of 7 million domestic net subscriber additions. Honestly, I think that's Reed Hastings resetting expectations too low. He overstates the potential impact of the Summer Games. Translation: Nobody in America really cares about them. It's like saying the Stanley Cup Playoffs or this weekend's golf tournament will hurt Netflix.
Two, Netflix will enter an additional international market in Q4. It warns in its
Q2 letter to shareholders
that this expansion will "temporarily" push the bottom line "back into the red."
Talking Like a Startup
Beyond that, things look better at Netflix than they have in a long time.
Gone are the days of misguided share buybacks. Welcome to the era of plowing domestic profits into what Hastings called a "once-in-a-generation opportunity" to be one of the globe's dominant video streamers. (Hear it on the conference call, available at the company's
investor relations Web site
Hastings also discussed his plans to expand to a new international market, return to profitability, expand to a new international market, return to profitability. This is more like it. It sounds closer to the
perpetual-startup model I can get with. Finally, Hastings speaks of a "virtuous cycle" that I can stamp with an endorsement.
Hastings masterfully took control of the conversation on yesterday's call. He altered its course. He provided analysts and investors with a different lens with which to view Netflix's future. At one point, Hastings said: "We have enormous challenges ahead, and no doubt will have further ups and downs as we pioneer Internet television."
"As we pioneer Internet television."
Whether it was the case or not, for most of 2011, Hastings made it sound like Netflix's cash was going into a black hole of content acquisition. And in some respects, it was. On yesterday's call, Hastings repositioned Netflix as a company with a clearly defined purpose.
Wiser Content Investments
Netflix will continue to invest in content that offers its subscribers excellent value and provides the company the most bang for the buck. And, as it expands and achieves profitability in a new market, Netflix will take those profits and reinvest them in further expansion. It seems very Amazon-like to me.
When you're a pioneer, it's perfectly fine to sacrifice the short-term in the name of setting yourself up to seize long-term opportunity.
Finally, Hastings is saying the types of things that should excite long-term investors. He's talking like Netflix is a startup.
While Hastings, in response to a question I sent in, claimed Netflix is "not reigning in content costs" and has undertaken "no shift" in its content-acquisition strategy, the numbers tells us otherwise. We'll get the official count when Netflix releases its 10-Q in a couple of days.
But on the call, CFO David Wells noted that off-balance sheet content liabilities are sequentially flat at about $3.8 billion. That marks the second quarter in a row when that number has not increased considerably.
Time will tell, but it does appear that Netflix is signing smarter, more specialized and more focused deals. As it noted in its Q2 letter to shareholders, it is signing more exclusive deals for TV shows (e.g., Mad Men and Breaking Bad) as well as movies (e.g., a deal with the Weinstein Co. that gives Netflix a window of exclusivity once the initial Pay TV period expires). Fewer and farther between are agreements that provide Netflix with loads of random rerun sitcoms that networks can no longer monetize.
In other words, I sense a transition to a model that stresses quality over quantity and serves lucrative niches as opposed to a loosely defined audience of everything and everybody. I recently rejoined Netflix and feel like its streaming value proposition has increased markedly from the beginning of the year. It's much less random than it used to be.
It doesn't happen all that often, so when it does I have to get all narcissistic on you. I am ahead of the curve on this stock.
I called the implosion way before it happened. And now, I'm ahead of the pack on the forthcoming uptrend.
I'm giving Netflix another six to eight months. If things continue to progress, I might buy the stock. I'm fully confident NFLX will breach $50 by the end of January 2013 -- around the time the company reports that Q4 loss. The time to buy will be after the Q4 report early next year.
At the time of publication, the author held no positions in any of the stocks mentioned in this article
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.