Don't Turn Off Netflix

NEW YORK (TheStreet) -- There's always plenty of drama with Netflix (NFLX).

It's common knowledge the company, which started as a DVD-by-mail model, has pioneered new ways for consumers to receive movies and TV shows via its streaming technology. But many are unaware that it was Reed Hastings, Netflix's CEO, who, by posting on his personal Facebook ( FB) page, forced the hands of the Securities and Exchange Commission to adopt social media as a legitimate outlet for corporate disclosures.

Like him or hate him, Hastings is good for Netflix and he's good for the stock market. There's never a dull moment. But does that mean the company, which many are struggling to love, is still a good long-term buy for investors? On Monday, these questions were once again raised.

Netflix, which I've once described as having had more lives than "24's" Jack Bauer, experienced another brutal episode during the after-hour session Monday, down by as much as 8% following what was (on balance) an excellent second-quarter earnings report. Investors were turning off Netflix even though the company beat profit estimates, while revenue were in line with Street projections. Guidance, however, didn't make the cut. But I wouldn't get carried away just yet.

The company reported 49 cents in earnings per share on revenue of $1.07 billion. These results blew last year's marks out of the water when Netflix reported profits of 11 cents per share on revenue of $889 million. Essentially, not only has Netflix grown revenue 20% year over year, but EPS has spiked more than 300%. What's more, the company beat the consensus EPS estimate by 22%.

Hastings has been able to grow the company despite all of the threats that pundits are quick to toss at him including Amazon's ( AMZN) Prime, Time Warner's ( TWX) HBOGo and Hulu. That Netflix has been able to string two consecutive quarters of impressive growth should now dispel concerns about the company's ability to execute.

The company's "grow at all cost" concept makes it hard for "traditionalists" to fully embrace the stock -- I get that. But these same pundits don't seem to mind raising the pom-poms for Amazon, which embraces similar ideals of "If you build it, they will come."

Are Netflix's costs still rising? Yes. But let's also agree that the growth performance has supported the increased expenses. Netflix said it added 1.2 million streaming subscribers worldwide, ending the quarter with 37.8 million. Of those new subscribers, 630,000 came from the U.S. Here, too, while it may cause plenty of anxiety to see the company's aggressive growth plans, we must also agree these investments are paying handsome dividends.

For that matter, I don't believe the company and, in particular, Reed Hastings have gotten enough credit for how well Netflix is now performing internationally, as costly as it may be. Unlike the rivalry that exists within the cable and satellite industry, Netflix subscribers have proven to be remarkably loyal. Don't think for a second that these rivals don't have just as much to fear from Netflix as Netflix should fear them.

Let us also remember that Netflix's model offer subscribers more options and costs much less. Time Warner and Comcast ( CMCSA) are constantly fighting for customers who are looking for more choices that an a-la-carte model might bring. They are demanding more flexibility. They get it from Netflix. While Amazon's Prime offer similar advantages, it falls short on selections.

Plus, given that Netflix has begun to produce exclusive content, the company now has a key way of differentiating itself from Amazon. While Netflix is still far from giving HBO a run for its money in the original series category, investors can be encouraged by the fact that Netflix is steadily improving margins, while revenue should continue to grow at double digit clips for several more years.

There will be many who will point to Netflix's soft guidance as grounds to stand taller on their "Netflix will die" soapboxes, but understand that it's the summer months -- a period during which people are expected to travel and be less engaged with what's on television. Netflix is just being a bit cautious here. Hastings is right not to set his company up for disappointment.

I believe Netflix has tremendous long-term potential. Granted, the subscriber totals for this quarter didn't impress the Street. But I don't believe this is a situation where the company has suddenly "peaked," as some have already suggested.

I would be a buyer here on this dip to $244, which is 10% below its 52-week high. I still expect the stock to reach my year-end price target of $300 on the basis on growing free cash flow and profits.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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