Speaking on Monday at the Value Investing Congress in New York City, hedge fund manager and CNBC Contributor Whitney Tilson said Netflix (NASDAQ:NFLX) offers a rare opportunity in the technology sector.
Emerging as one of the best performers in the S&P, shares in the company have increased 33 percent this year to date. Tilson, who has been bullish on the stock since it traded for around $77 late last year, thinks the company’s gains are just beginning.
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On CNBC’s “Fast Money,” Tilson compared the online video service to the company Amazon (NASDAQ:AMZN) was 10 years ago. Both companies use technology and the Internet to deliver an old product in a new way, both have visionary and entrepreneurial CEOs, and both are willing to sacrifice short-term profits for long-term growth.
“Two companies, 10 years apart, very similar,” said Tilson on the program, “and my point is, that’s the kind of upside that Netflix has if it executes well.”
Ten years ago, Tilson said Amazon held the same market capitalization as Netflix does now; but at that time, Amazon competed with Wal-Mart (NYSE:WMT) despite its net debt position.
Tilson gave several reason for his bullish outlook on Netflix: first, with a less than $5 billion market capitalization, Netflix makes an easy acquisition; second, the company has a large global growth opportunity; and third, according to company CEO Reed Hastings, its U.S. subscriber growth has increased.
“As long as Netflix has dominant market share and no new competitors to erode its competitive position,” said Tilson to CNBC, “we see no reason why Netflix business won’t grow at 30-40%.”
While investors have shown concern about Netflix’s rising cost of licensing video content, Tilson paraphrased the company’s CEO, “As Reed Hastings once said, ‘The content providers obviously want to charge me as much as they can, but to get the content, I only have to pay $1 more than the next bidder.’ And who’s the next bidder here?”
Amazon is Netflix’s closest competitor with its Instant Prime Video. In August, Netflix lost its exclusivity contract with Epix, a pay-TV channel which provides content from Paramount, MGM, and Lionsgate. In September, Amazon signed a deal with Epix that added 3,000 films to its content catalog. Hulu, which is partly owned by NewsCorp (NASDAQ:NWSA), also bids on the same content as Netflix, but claims less than 10 percent the subscribers. Currently, the service has 28.3 million subscribers, which makes the company the market leader.
While Tilson’s firm was short on Netflix during its rise in 2010, he now sees “enormously optionality” in the stock.