Netflix, Inc. (NFLX)’s Horror-Flick Sequel

Following Netflix, Inc. (NASDAQ:NFLX)‘s blowout quarter, the raft of analyst estimates have come in, and the financial picture seems to look greatly improved. Wall Street bumped its 2013 EPS projection to $1.15 from $0.40, and 2014 looks even rosier. Instead of $1.44, they now believe the streaming champion will bring in $2.74 per share.

There’s a problem here, though. At a price around $160 per share, that’s a considerable multiple to pay for a stock that already imploded once. This is starting to look like 2010 again for Netflix.

Be kind, please rewind
Let’s take a look back and go over what happened last week as shares jumped a whopping 71% for the week. Reporting fourth-quarter earnings, Netflix delivered an EPS profit of $0.13 against expectations of a $0.13 loss. That’s enough of a surprise, but the video streamer also made a huge jump in subscribers, adding nearly 4 million subscribers worldwide, bringing its streaming total above 33 million. That’s all great news, but some areas were wanting in the report. Revenue grew by just 8% over a year ago as Netflix has chosen to harvest its now 8 million DVD subscribers, but those mail-order holdouts still give the company more contribution profits than its domestic streaming base.

The table below shows the discrepancy among its three segments:

Source: Netflix Q4 Letter to Shareholders.

Mail-order DVDs are by far the most profitable segment, but that division has been declining. Without the DVD business, the company would have barely had any gross profit in the quarter.

Additionally, of the 4 million new subscriptions, 1 million of them were not paid.

Deja vu, all over again
The stock situation isn’t the only thing giving investors a seen-it-before feeling. Netflix won the hearts of movie-watchers for disrupting the brick-and-mortar model championed by Blockbuster, which came with endless debates and fits of indecision over which movie to take home. But as technology moves forward, Netflix has been forced to reinvent itself. Streaming is supplanting the mail-order model, which makes Netflix more vulnerable to the likes of rivals such as Amazon.com, Inc. (NASDAQ:AMZN), Hulu, and Time Warner Inc. (NYSE:TWX)‘s HBO GO. But perhaps more important, streaming doesn’t give Netflix the leverage it had with the mail-order model, as the contribution margins above indicate.