A Contrary Way to Play Netflix

 | Jan 26, 2012 | 11:24 AM EST
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Netflix (NFLX) is so tough to fathom. This stock has become the ultimate battleground between the shorts and the longs and sometimes I think you just have to step away lest you get dinged by some errant shrapnel.

We do know this: CEO Reed Hastings made a big mistake when he announced new pricing packages and subsequently split the company between streaming and DVDs. Both moves were hated.

But he has since adjusted. Netflix is winning back customers and Hastings has recognized that while DVD sales are eventually going to go the way of Internet dial-up, that is not enough reason to make two companies out of one.

Here's the problem I have: Hastings probably has a better handle on what customers want in this new age than anyone I have come across. He recognized that people want to watch content when they want to watch it and he recognized the value of catering to those in the club who want that.

But he hurt the club's feeling big time with the fall announcements. In addition, he has been unable to negotiate the content deals that will give people what he knows they want, and this has caused subscribers to migrate to other places to watch video. The makers of content that were so quick to sign deals with Netflix because they saw free money coming over the transom have gotten wise and the sites of the big cable brands have become competitors.

Still, Hastings knows more about the business than the analysts who cover the stock and he made that clear in a funny moment on the call when he said the average household watches eight hours of TV a day -- and the average investor doesn't come anywhere near that.

He also said that the streaming customer is much more valuable than the DVD customer because of the minimal costs of servicing the customer. These are all great insights.

So what do you do? If you really think that Netflix is coming back, then I actually think you should buy shares of Time Warner Cable (TWC), which based on its superiority in diversifying revenue and its excellent paid and free model, Hastings seemed to be incredibly envious of on the conference call.

I know -- some might say that's punting. But sometimes you just have to. There are so many people wanting to play this name and so many cross-currents, that it's just not worth it to try to predict the next 2 points let alone the next 20.


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