By Kevin Kelleher, contributor
FORTUNE -- Netflix and the Nasdaq 100 Index are something like one of those break-up to make-up couples. In December 2010, Nasdaq entered the index -- a benchmark more focused on leading companies than the broader Nasdaq Composite -- after the stock more than doubled in the previous year to $200 a share.
Two years later, after a controversial move to split streaming and DVD subscriptions and amid concerns about rising content fees, Netflix's stock had fallen back to around $90 a share. Nasdaq kicked Netflix (NFLX) out of its index, along with other tech giants like Research in Motion (BBRY) and Electronic Arts (EA). In a statement, an exchange official noted that the moves were made to keep the index, which underlies thousands of ETFs and other products, "a relevant investable index."
Less than a month later, Netflix began to become "relevant" again. And very investable. The stock has risen 147% since it left the Nasdaq 100 six months ago. So it's going back in the index this Friday. The move is unlikely to have a substantial impact on what has become a notoriously volatile stock. But it also underscores the perils of speculating about Netflix's future. Nasdaq, like everyone else, can't know for sure where the stock is going.
That doesn't stop people from getting passionate about the matter. Few stocks are as divisive as Netflix. There seems to be no middle ground. Bulls and bears wage wars of words on message boards and blog comments, just as shorts and longs play tug-of-war with its stock price. So its reentry into the Nasdaq is a good chance to weigh the bull case for and the bear case against the stock. On pretty much every count, there are strong arguments on both sides.
Content costs: The bears have harped on this for years, arguing that media giants that own TV shows and movies can play Netflix against its rivals to jack up licensing fees. The bulls counter that the shift into original programming has given Netflix an edge, shifting it to an HBO-like business model that, thanks to shows like House of Cards, boosted U.S. subscribers by 2 million last quarter.
Advantage: Bulls, for now. As Netflix rolls out more shows like the new season of Arrested Development, a $7.99 monthly subscription is attractive. The question is how much longer Netflix can keep its subscriber base growing with original programs.
Financial performance: There is plenty here for proponents and detractors. Netflix revenue grew at a healthy 26% clip last quarter -- beating most analyst forecasts -- but its spending on international expansion and new programs pushed its operating cash flow to a negative $4.5 million while free cash flow came in at negative $42 million.
Advantage: Bears. While higher-than-expected revenue is always welcome, the cost of expansion always presents a risk that heavy spending may not pay off, especially in a competitive market like online video. Some spending is paying off: Gross margins last quarter rose to 29% from 26.8% the previous quarter, but that's still below the 39% margin two years ago. Until Netflix shows its recent spending can deliver consistent profit growth, bears will have the upper hand here.
Competition: Lots of deep-pocketed companies are moving the turf that Netflix has long ruled, or they plan to: Amazon (AMZN), Google (GOOG), Apple (AAPL), Yahoo (YHOO). But has their moment passed? When Netflix angered subscribers by splitting off the DVD business and charging separate subscriptions, competitors had a chance to steal away disgruntled customers. Instead, those customers seemed to have defected to the local video store.
Advantage: Bulls. Netflix still has the best tablet app and the most compelling (if shrinking) video library online. Right now, people may not object to paying Netflix as well as others a monthly subscription fee. That may change, however, if those fees start to rise.
Valuation: Bears only need to point to the current PE ratio of the stock: 540. Bulls have to work harder to make their case: Only three times recent revenue and three times enterprise value. Plus, Netflix has long traded at a high valuation. Plus, if you value the stock on 2014 earnings, it's only trading at 72 times expected earnings.
Advantage: Bears. Come on.
Momentum: If as the saying goes, the trend is your friend, it's favoring bulls. Despite the surge in the stock this year, bears haven't been building up their short positions. Short interest on Netflix has been steady at around 9 million or 10 million shares, or two days to cover. Last fall, short interest was as high as 17 million shares.
Advantage: Bulls. Few dare to stand in the way of this stock right now. The stock will remain volatile in coming quarters as Netflix shows whether its spending is leading to long-term profit growth and as the market settles on a price of a stock that seems impossible to value by fundamental analysis.
Overall? For the time being, the advantage is on the side of the Netflix bulls. Especially if you add in the uncanny ability of Reed Hastings to predict and even reshape the future of online video. It's paid off in the past to bet against Hastings. But it's never paid off for very long.
A graphic representation of where $26.74 billion came from in Q1, and where it went
The graphic above, courtesy of Asymco's Horace Dediu, compares Apple's (AAPL) cash flow for fiscal Q1 2011 (on right) with the same quarter in 2010 (left). It shows, more clearly than any other chart I've seen, where Apple's revenue came from, how much of each product's sales went to suppliers, how much was available to MOREPhilip Elmer-DeWitt - Jan 28, 2011 12:13 PM ET
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