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.
The loss of hundreds of titles isn't slowing Netflix's momentum.
FORTUNE -- One of the most frequent complaints about Netflix (fair or not) is the supposed paucity of titles available for streaming. That complaint is about to get louder and more frequent because about 1,800 titles will be pulled because Netflix's (NFLX) licensing agreements for them are expiring today.
It's being called "The Great Netflix Purge" and "Streamageddon" (sometimes by the same MOREDan Mitchell, contributor - May 1, 2013 12:46 PM ET
TV is clearly outshining the movies. But when will we know if original content from companies like Netflix is a workable business?
By Kevin Kelleher, contributor
FORTUNE -- Television is enjoying something of a golden age. With shows like The Walking Dead, Breaking Bad, and Game of Thrones drawing praise as well as rabidly loyal viewers, it's often remarked that TV is better than the movies. And, because golden ages can create MOREMar 14, 2013 9:31 AM ET
Yes, the streaming company pulled itself out of a tailspin of bungled decisions. But now it is on the brink of making an even bigger misstep.
By Kevin Kelleher, contributor
FORTUNE – For most of its history, Netflix had the rare knack of taking bold steps that proved shrewd in retrospect. Then, last year, it famously bungled a series of announcements before eventually righting itself. The company may be taking another misstep: MOREMar 14, 2012 5:00 AM ET
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* Netflix (NFLX) CEO Reed Hastings on his company's rise, fall, and slow redemption. (Vanity Fair)
* Google (GOOG) is reportedly working on a pair of goggles -- really eyeglasses -- that will project information onto the lenses. If true, expect them to go on sale by the end of this MOREJP Mangalindan, Writer - Feb 23, 2012 9:40 AM ET
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* Netflix (NFLX) CEO Reed Hastings published a letter to shareholders earlier this week that (vaguely) explains how his company plans to rally after months of strategic missteps. "We don't have to 'beat' Starz or other networks to succeed," he wrote. "We won't have every movie or TV series; but we MOREJP Mangalindan, Writer - Oct 26, 2011 3:30 AM ET
Yes, it has to evolve or die. But lost in the drama over its recent bold moves is a big change that cuts directly to the core of its brand.
By Kevin Kelleher, contributor
FORTUNE -- Credit Netflix with this much: It knows how to stay ahead of the game. In the Internet industry today, you either thrive by making bold and original moves, or you languish as you struggle to ape MORESep 27, 2011 11:56 AM ET
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* Sources tell All Things D that HP (HPQ) is laying off as many as 525 employees whose work related to (now-defunct) webOS hardware. Indeed, in a statement, HP confirmed layoffs start this week but declined to specify the number. (All Things D)
* As reported yesterday, Google Wallet is now live, MOREJP Mangalindan, Writer - Sep 20, 2011 3:30 AM ET
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* The Netflix-Starz partnership is no more, meaning all Starz content on the movie and TV-streaming service will be unavailable beginning next February. In a statement, Netflix (NFLX) CEO Reed Hastings told Business Insider that domestic viewership of Starz content has declined to 8% given increasing content from MOREJP Mangalindan, Writer - Sep 2, 2011 3:30 AM ET
Netflix fees are still insanely low and the prices it pays for rights to movies and TV shows are about to soar. Investors better get used to this new reality.
FORTUNE -- Netflix (NFLX) on Monday reported a 57% increase in profits. Its stock on Tuesday plummeted by more than 10% during trading before recovering to a level 5% below the previous day's close. The plunge, at least according to reports, came MOREDan Mitchell, contributor - Jul 27, 2011 5:00 AM ET
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