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.
Few stocks involve more guessing than Amazon. The company is tightfisted when it comes to disclosing data or metrics.
By Kevin Kelleher, contributor
FORTUNE -- No matter how much research is done before an investment, there always remains a little bit of faith when it comes time to place a trade. People may mock analysts when their forecasts are off, but the analysts who aren't pressured by their firms to dress up MOREKevin Kelleher - May 9, 2013 5:00 AM ET
Some of the world's most well-known and powerful tech titans -- IBM, Microsoft, Intel -- are marked by trying to manage declining aspects of their businesses.
By Kevin Kelleher, contributor
FORTUNE -- At its heart, the tech industry is about the new. Today, tech giants succeeded because of what was new yesterday. The flip side is that the new ages into the old more quickly in tech than in most other industries. MOREApr 23, 2013 6:51 AM ET
The first test of Apple's new guidance philosophy: Belief vs. reasonable confidence.
FORTUNE -- In January, when Apple (AAPL) reported its earnings for the December quarter -- its first fiscal quarter of 2013 -- the company made explicit a change most investors seem to have missed.
For years Apple had been low-balling Wall Street, offering revenue and earnings forecasts every three months so "conservative" they became a running joke. Every quarter, everybody MOREPhilip Elmer-DeWitt - Apr 21, 2013 7:36 AM ET
The Street's expectations for fiscal Q3 2013 are down at least 5% since early March
FORTUNE -- Although Apple (AAPL) investors are plenty nervous about next week's March quarter earnings report, the stock's drop to 16-month lows this week may have more to do with jitters about the next report -- the one for the quarter that ends in June.
The Street's consensus as of Friday, according to Thomson Financial's survey of MOREPhilip Elmer-DeWitt - Apr 20, 2013 8:26 AM ET
Is there no limit to how much value Wall Street can take out of the stock?
FORTUNE -- In the fall of 2000, when you could buy Apple (AAPL) for $7, the stock's value measured by how much profit it was generating for each outstanding share -- the famous PE ratio -- hit an all-time low of 5.76, according to Wolfram Alpha (see chart below).
On Friday morning, when the stock touched MOREPhilip Elmer-DeWitt - Apr 19, 2013 8:27 AM ET
Retooled e-commerce giant eBay wants users to take a second look.
By Kevin Kelleher, contributor
FORTUNE -- Analyst day is one of the less exciting rituals in Silicon Valley. It usually involves updating a Powerpoint made for a recent investment conference, appending a question-and-answer session, and waving goodbye to investors as they walk out with the logo-ed tchotchkes destined for a wastebasket.
eBay's (EBAY) analyst day last Thursday, however was a notable exception. MOREApr 2, 2013 7:07 AM ET
It ends this week. Investors might as well get ready for the negative headlines.
FORTUNE -- The bad news is that every analyst we've surveyed -- even the most bullish -- believes that for the first time in a decade Apple (AAPL) will report that its income this quarter was lower than the same quarter the year before.
According to Thomson Financial, the consensus EPS for fiscal Q2 2013 on Friday was MOREPhilip Elmer-DeWitt - Mar 24, 2013 9:43 AM ET
Initial public offering side effects include first-day pop followed my painful malaise. Take with caution.
By Kevin Kelleher
FORTUNE – First Groupon fired Andrew Mason. Now Pandora says Joe Kennedy is leaving Pandora. Being a CEO of a company that made a splash in the public markets with high-flying IPOs is starting to look like a job hazard.
Pandora (P) priced its shares at $16 in June 2010. On its first day of trading, MOREMar 8, 2013 10:02 AM ET
Lazy, according to a study of firms, like Apple, with periodic 14-week quarters
FORTUNE -- One of the mysteries that lingers from Apple's (AAPL) most recent quarterly report -- when the company failed to meet Wall Street's expectations and its stock suffered its worst one-day loss in four years -- was whether the analysts who set those expectations were aware that the quarter was one week shorter than the same quarter MOREPhilip Elmer-DeWitt - Feb 2, 2013 3:14 PM ET
|Much faster Wi-Fi coming soon|
|Chinese billionaire buys 007's yacht maker|
|Dow sinks 200 points after Fed hints at stimulus easing|
|J.D. Power ranks GM tops in quality for first time|
|Stratasys buys Makerbot 3-D printing company for $400 million|