Netflix, Inc. (NASDAQ:NFLX)’s recent quarter was more or less hailed as a resounding success as the company was able to grow its total subscriber base to 36 million. Not to mention that the international division was able to break-even for the first time. Shareholders of Netflix were cheerful of the earnings, with the stock rallying 24%
Netflix synopsis
Netflix, Inc. (NASDAQ:NFLX)’s recent quarterly earnings report has launched the company into stardom. It also helps that Carl Icahn invested billions of his own dollars into the company. Now, to be honest, I had no clue as to who Carl Icahn was until the Netflix and Herbalife issues came to the forefront in the Wall Street Journal. But, that’s really beside the point.
Netflix’s stock price has grown staggeringly due to the deals it was able to make with Warner Bros. and The Walt Disney Company (NYSE:DIS). Time Warner Inc (NYSE:TWX) is an entertainment juggernaut, but it didn’t just end at Warner Bros. Netflix, Inc. (NASDAQ:NFLX) was able to score a deal with Walt Disney; this was the show-stopper that caused the stock to rally from $60 to $80. From $80 to $100 was the anticipation of the fourth-quarter earnings. With the fourth-quarter earnings a success, Netflix stock advanced from $100 to $180 per share. The success in the first quarter caused the stock to jump from $160 to $220 per share.
Earnings highlights
Source: Netflix
Netflix, Inc. (NASDAQ:NFLX) has been able to improve its contribution margin to 20.6% from 19.2%. The improvement in the contribution margin, along with subscriber additions of 2.03 million, caused the stock to surge. Doing some basic math, 2 million additional subscribers is like earning an additional $192 million in revenue per year. A single subscriber generates $8/month, or $96/per year.
The international division was able to grow its annual revenue by $96 million for the whole year, based on the net additions of a million subscribers. By the end of the next quarter, subscriber additions are expected to increase an additional million within the United States, with the international streaming expected to grow subscribers by 800,000. The growth was exponential, which is why investors are bidding the value of the stock higher.
Changing technology landscape may support Netflix
Google Inc (NASDAQ:GOOG) has been rolling out the development of its fiber network with blazing internet 1gb/s speeds (100 times faster than today’s broadband). The fiber network will generally lead to faster download times, which should improve the demand for streaming services like Netflix, Inc. (NASDAQ:NFLX). However, Netflix may have to respond to faster network speeds with higher quality movie files.
How much higher quality (perhaps 4080p), maybe 3D movies streamed to the desktop? Who knows? But I can smell rising capital expenditure costs for Netflix from a mile away. Verizon’s FiOS network was able to grow its revenue 16% year-over-year. Google Inc (NASDAQ:GOOG), encouraged by Verizon’s results may hasten its roll-out of fiber optic cable. Google Inc (NASDAQ:GOOG)’s near bottomless bank account will certainly change the internet landscape.
In a previous article I wrote; I assumed that if Google Inc (NASDAQ:GOOG) was able to capture 10% of the United States market for broadband services, it would contribute approximately $12 billion a year in revenue to the search engine giant. That being the case, analysts at Google Inc (NASDAQ:GOOG)’s recent earnings announcement asked, why Google Inc (NASDAQ:GOOG) was pursuing lower margin businesses outside of search.
Larry Page shrugged it off by stating that there aren’t that many businesses that are larger than search, therefore, investing capital into businesses outside of search that correspond with its overall business strategy was one of the ways it would sustain its incremental revenue growth.
Amazon.com, Inc. (NASDAQ:AMZN) is using its Amazon.com, Inc. (NASDAQ:AMZN) Prime as an entry-point into the movie streaming business. But without exclusive contractual agreements with Disney and Time Warner (which Netflix has), I see no long-term business opportunity from the movie streaming business for Amazon.com, Inc. (NASDAQ:AMZN). While I acknowledge that Jeff Bezos is a talented CEO and his corporate vision is what caused the company to grow to this point, I highly doubt that the online retailer will waste any money trying to woo the remaining content creators onto Amazon Prime.
Amazon Prime would serve shareholders better by being a “club membership package”, similar to Costco Wholesale Corporation (NASDAQ:COST)’s card membership program. Instead, Amazon.com, Inc. (NASDAQ:AMZN)’s ambitiousness, while good, is also harmful to its customers. The money Amazon wasted on buying movie content rights could have been better spent on pass-on savings to customers (discounts).
Instead, I’m left with an Amazon.com, Inc. (NASDAQ:AMZN) Prime that gives me movie streaming privileges rather than an added discount on my online purchases. Awkwardly enough, Amazon.com, Inc. (NASDAQ:AMZN) generates (0.06)% profit margins, and could improve those margins by re-focusing capital on business initiatives outside of movie streaming.
Netflix remains hot
Netflix, Inc. (NASDAQ:NFLX) has difficulty with giving out guidance beyond a quarter. Don’t blame them; guidance beyond a quarter isn’t likely to be that accurate as its growth is affected by a lot of external and internal factors. Netflix expects revenue streaming to grow to $665 million in the second quarter, along with profit of $139 million (from the United States). International streaming is likely to have 7.3 to 7.9 million members (really broad range), with revenue at around $156 to $170 million in the second quarter.
Netflix expects EPS at around $0.23 to $0.48 per share. I’m expecting Netflix to generate EPS figures towards the higher end of the range. EPS in the first quarter came in at around $0.05 per share, so, assuming Netflix is able to grow EPS to $0.48 per share, quarter-over-quarter earnings growth would be around 860%.
Conclusion
Netflix has been able to sustain its growth even without the content additions coming into full effect from Warner Brothers and Disney (Netflix gets exclusive content rights starting in 2016). So, in the meantime, Netflix is still able to post some strong revenue and net income growth without Disney. What would happen if Netflix were to receive its content from Walt Disney? No one really knows the full effect, but I could imagine Netflix raising the prices of its streaming service in 2016 once Netflix is able to secure Walt Disney’s and Warner Brothers content library.
We don’t have to look far out as 2016 to be optimistic on the stock. Analysts anticipate fairly strong growth: EPS estimates are coming in at around $1.32. EPS growth is estimated at around 355.20% for 2013. Netflix’s guidance implies that quarter-over-year EPS may grow 800%, implying that Netflix will be able to report growth that’s substantially higher than the consensus estimates for the fiscal year.
Netflix’s core competencies in movie streaming shouldn’t be questioned. The improving financial condition is firing up the bulls. Investors have to stay the course with this high growth stock. It would be foolish to jump-off the gravy train now.
The article A Few Reasons Why You Should Buy This Stock originally appeared on Fool.com.
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