Is Netflix (NFLX) a Victim of Its Own Success?

Small-cap stocks have significantly outperformed the major blue chip indexes recently. But for long-term investors or folks in small-cap mutual funds or ETFs, there are a handful of top-performing companies that no longer deserve the label of "small cap" in your portfolio. That's because  these picks have seen runaway growth despite a crazy market in the last two or three years and now could be peaking — or at least, seeing growth slow significantly. I have discussed two of these companies so far this week, via ARM Holdings (NASDAQ: ARMH ) and AutoZone (NYSE: AZO ). Next up is Netflix (NASDAQ: NFLX ) — which had a market cap at the end of fiscal 2007 that totaled $1.7 billion and is now pushing $9.2 billion in market cap. Their businesses are quite different . . . ARM Holdings is a semiconductor stock and AutoZone is a car-parts retailer. But they each illustrate how rapid growth can only continue for so long.  Netflix (NASDAQ: NFLX ) is a typical high-tech success story: Come up with a great innovation for the digital age and ride that technology as far as it will go. Partnering DVD rentals with the postal service and the Internet was one of those ideas that seems so obvious in hindsight, but two California entrepreneurs laughed all the way to the bank by coming up with the idea first. The ascent of Netflix is common knowledge to investors, so we won't belabor the point here. Some highlights include doubling its revenue in the last four years, from just shy of $1 billion in fiscal 2006 to a projected $2.2 billion at the end of the current fiscal year and a nearly 500% surge in stock price since 2008. But with 16.9  million subscribers, the real question investors should ask is whether Netflix can keep growing — and if so, whether that growth is going to slow down. I don't have a crystal ball so I can't tell you what the future of home entertainment will be. Netflix succeeded in sending brick-and-mortar rental outfit Blockbuster into bankruptcy, but clearly it's going to need another trick beyond hard DVD sales. The company currently offers a limited catalog of streaming movies and TV shows on demand, and this appears to be the area of future growth. However, unlike the movie mailing game, Netflix is far from alone in that arena. Broadcast TV channels all offer their own programming via their own websites, and Apple Inc. (NASDAQ: AAPL ) and Google Inc . (NASDAQ: GOOG ) are both pushing to bring their own streaming video boxes into your home via Apple TV and Google TV . Then there's Hulu, movies on demand from cable companies like Comcast (NYSE: CMCSA ) and Time Warner (NYSE: TWX ),  and of course the threat of a new technology that we haven't heard about yet. Netflix is surely a great company that was smart enough to look beyond postal DVD rentals and to streaming video. But whether the company can dominate the digital arena is a big question. While Netflix added almost  2 million new subscribers during the third quarter, that kind of growth has to hit a wall eventually. Whether you think that wall will come in two quarters or two years, this much is clear:  Netflix has grown large enough and seen a big enough run-up in shares that it's unlikely to have many more big moves up its sleeve. Even if you are one of the investors who strongly disagrees that NFLX shares are overbought right now, you should seriously ask yourself if it's realistic for this stock to continue its small-cap growth curve. Without another game-changing technology, it's likely Netflix will see its red-hot sales growth cool off in the months ahead. Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter at http://twitter.com/JeffReevesIP .
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