Reed Hastings, CEO
Netflix has seen a tremendous increase in the monthly profit per customer since 1Q13 and this is likely to continue for some time. The only problems are the valuation and the fact that the stock is already up 40% since the announcement of the price increase.
Lets start taking this apart by looking at monthly profit per subscriber taken from the quarterly earnings report:
(Click to enlarge) Netflix Customer Monthly Data
Profit per customer is up substantially: If you look at customer profit, you can see a dramatic increase to $0.44 per month in June from $0.02 per month in March 2013. This is probably due to a combination of the international expansion and lower cost of DVD servicing as the number of DVD subscribers declines. If you look at the Y/Y growth for customers and profit, you can see the dramatic decline in DVD subs at the same time that profit growth is rocketing.
Netflix Year over Year growth
As Netflix rolls deeper into Europe and the financial benefits increasing prices contribute to top line growth through out the next year and a half, numbers should continue to improve.
Valuation is scary: The two problems are the valuation and the 40% increase in share price since the announcement. The stock trading at 150x trailing earnings so a good chunk of the price increase is probably already priced in.
Share price since announcement
Stock up 40% since announcement: The chart above is the price since the May 9th announcement of raising prices. If you want to participate in Netflix today, rather than buying the stock outright, I would consider selling a deep out of the money puts or a put spread.
How the NFLX Put Sale works: By selling puts I would be acting like an insurance company but for investors. The strike price of the contract I sell would be the price I would have to pay for the shares if the stock is put to me. You don’t make nearly as much money as buying a high flying stock outright but you can reduce the risk you are taking on. Lets look at an example. If I sold a January 2015 put with a strike price of 410, I would not have the stock put to me unless it falls more than 10% from yesterday’s closing price ($455 – 45 = 410). If the stock remains above $410, I would sit back and wait for the contract to expire and keep the price I received for selling the contract. In this case, the price for a $410 Jan 15 put is $28. Selling puts is not for everybody, it locks in your upside and it may seem complicated at first but it is less risky than buying the stock outright.
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