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Quickflix: A small cap with enormous potential

Although the past decade has proven challenging for the Australian online movie company, Quickflix (ASX: QFX), the future is looking more positive as it looks beyond its DVD business and plans to continue growing its streaming business.

Despite having shipped more than 20 million DVDs and 5 million movie streams in its 10 years of existence, Quickflix is yet to turn a profit and is described as ‘Australia’s oldest start-up company’ for this reason. The company’s boss, Stephen Langsford, even admitted that, “there have been times when it looked doubtful, a lot of red ink was spilled” — particularly last year when overambitious marketing activity bled the company of cash and threatened its very existence.

At this time, the company was forced to shed a third of its workforce and close a number of its DVD centres in order to preserve its cash position. However, as is the case with any company or investment opportunity, it is the future that counts.

Prospects

Langsford stated that the company would have generated profits by now had it not invested so heavily in technology that would enable online streaming (it is believed that $60 million has been spent on this technology). In future years, this will become Quickflix’s primary source of revenue as demand for DVDs inevitably fades out.

According to Langsford, the completion of its online streaming service as well as a $5 million capital raising, which wiped the company of debt and enabled the company to acquire new content, the company is again in an excellent position for growth. He said, “We are now generating more revenues and have stopped the cash burn, so we are moving in the right direction… We have the technology, our cost base is steady and revenues are still incoming. The only milestone we have left is profitability.”

However, whilst the future may be in streaming, it is also vital that the company does not get too far ahead of itself or the preferences of its customers. It may be a declining market, but mail-order DVD rentals remain the company’s primary source of revenue. “The trick is to be sufficiently invested in the new technology without getting too far ahead of the customers’ usage behaviours.”

Quickflix isn’t the only company striving for a share in the growing streaming market. Telstra (ASX: TLS) is continuing to expand its Bigpond Movies whilst JB Hi-Fi (ASX: JBH) is also streaming movies with JBNow. US giant Netflix (NASDAQ: NFLX) has exceeded in the industry and has delivered enormous returns for shareholders in recent years.

Foolish takeaway

Although Quickflix’s business model could prove to be ultimately successful, the company boasts a market capitalisation of just $18 million, making it a very risky investment prospect. Investors wanting a bit more safety should consider other opportunities.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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