Foolish Forecast: Netflix in My Crystal Ball

If you watch movies at all, you probably know who Netflix (Nasdaq: NFLX) is. The online video-rental maven reports second-quarter earnings tonight. The first quarter did not impress Mr. Market, and the stock is 20% cheaper today than it was three months ago. Distributing movie streams through Microsoft's (Nasdaq: MSFT) Xbox 360 didn't even help. Let's divine the company's future together.

What Fools say:
Here's how Netflix' CAPS rating stacks up against some of its peers and competitors:

Company	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Apple (Nasdaq: AAPL)	$147.3	34.3	****
Amazon.com (Nasdaq: AMZN)	$29.5	59.1	**
Netflix	$1.73	24.5	***
Blockbuster (NYSE: BBI)	$0.53	36.4	*

Data taken from Motley Fool CAPS on July 24, 2008.

Nearly every CAPS bear sings the same sad song about Netflix. Here's your solo, joker245: "Great company, but it'll get streamed and VOD'd out of existence shortly."

All-star player PhillyGator does not subscribe to that theory: 

Streamed video market leader I think. Let's get this up to four stars. They have a great product through the mail and instantly to your TV/PC.

What management does:
The company's current long-term ambition is to reach 20 million subscribers in "the next several years," so sales growth is taking a back seat to subscriber growth. Assuming no dramatic changes to the business model, my projections of current growth trend would push Netflix over 10 million users about a year from today, which would be three years after the 5 million mark.

Margins	12/06	3/07	6/07	9/07	12/07	3/08
Gross	37.1%	37.5%	37.0%	36.0%	34.8%	33.6%
Operating	6.5%	6.6%	6.8%	7.0%	7.0%	7.2%
Net	4.9%	5.1%	5.5%	5.6%	5.6%	5.7%
FCF/Revenue	22.1%	21.0%	21.0%	20.9%	20.5%	21.8%

Growth (YOY)	12/06	3/07	6/07	9/07	12/07	3/08
Revenue	46.1%	43.0%	37.7%	29.3%	20.9%	13.8%
Earnings	16.8%	(1.3%)	(5.3%)	(8.8%)	36.4%	29.2%
Subscribers	57.0%	51.0%	43.0%	35.0%	27.0%	23.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
If you think that the movie business is all fun and games, think again. "We're a high-performance team, not a family," according to Netflix's recruitment materials. "In many companies, adequate performance gets a modest raise. At Netflix, adequate performance gets a generous severance package. [...] Plentiful extraordinary talent makes for a high-functioning company." These guys mean business.

The same documents also say that the online entertainment revolution is just starting, and "it's going to be a fun next ten years at Netflix." Short term traders shouldn't trouble themselves with this stock, then -- the company is managed with a seriously long-term vision. And while the DVD-by-mail business will eventually phase out, but those shiny discs have several years of life left in them.

That said, things do look better than usual in the short term. The gas price run-up, combined with an explosion in high-definition TV sales over the past year or so, make a strong argument for staying home to watch movies, rather than going out. My crystal ball puts Netflix at 8.7 million subscribers this quarter -- but given those trends, that glass ball may be lowballing me. Bowl me over, boys!