Netflix Bucks the Trend on an Ugly Day

Sifting through my watch list of stocks today is a depressing activity.  Down days are one thing, but days like this are another.  You know what I’m talking about, those days in which there is absolutely no bid to the market.  While the entirety of my watch list is plastered with red (other than the US Dollar and Treasuries…the safety trade), Netflix (NASDAQ: NFLX) is a lone pocket of green.

What was the catalyst behind this impressive relative strength?  Yesterday the company announced it had reached a deal with Epix for the streaming rights to Paramount, Lions Gate and MGM films.  While Netflix is paying a handsome sum for these rights ($1 billion over the next five years to be exact), this helps solidify the company’s moat against competition in the rapidly growing streaming market.  The future of Netflix’ profit  growth is in streaming media.  Streaming enjoys much higher margins than the dvd-by-mail model, and as new products facilitate ease of use (such as the proliferation of iPads, check out Derek’s review here), the market itself is rapidly expanding.

This deal with Epix is a rather significant coup, as the trio of companies behind Epix hold the rights to a vast and diverse catalog of popular content.  Adding this to the ever-expanding streaming library over at Netflix goes a long way towards maintaining the company’s impressive customer loyalty track-record and attracting new subscribers.  With this deal, the company is now on the verge of become a major force in where and how people consume media.  Their built in audience is so vast at this point that some are even suggesting it’s only a matter of time before Netflix produces original content, like an HBO or Showtime.

When Netflix reported earnings just over two weeks ago, the stock took a beating for missing their revenue number, despite reporting impressed EPS and margin growth.  To make matters worse, the next day, the Wall Street Journal put out an editorial that suggested Netflix just might be the next Crocs (NASDAQ: CROX).  I quickly wrote a rebuttal, stating the bull case for Netflix, and in the comments on that article, mentioned my intention to buy the stock at around the $90 level.  Unfortunately for me, I never pulled the trigger and the stock is once again trading northward of $120, having reached as low as $95.33.  On the next pull in I will not miss my entry!

Netflix has impressive relative strength on a big down day.

Disclosure: No position.