Web streaming giant Netflix (ticker: NFLX) reported blowout third-quarter earnings Monday afternoon, causing shares to soar as much as 20 percent in after-hours trading. Shares opened up about 17 percent higher on Tuesday morning.
Revenue increased 32 percent from the year-ago period to $2.29 billion, setting a new company record and exceeding the $2.28 billion consensus. More impressive was the company’s profitability, which, at 12 cents per share, was twice as high as the 6 cents per share analysts expected.
The real reason Wall Street was so emphatically pleased, however, was Netflix’s subscriber numbers. Last quarter NFLX management guided for membership growth of 2.3 million in the third quarter; it ended up adding 3.57 million streaming subscribers instead. Netflix specifically cited original series “Stranger Things” and the second season of “Narcos” as driving its strong growth.
Subscriber growth is the name of the game, because it’s not just a one-time financial boost — it’s a growth in future recurring revenues as well. The gift that keeps on giving.
[See: How to Invest in Streaming Media.]
U.S subscribers grew by 370,000, exceeding the company’s 300,000-member forecast, while international subscriber growth clocked in at 3.2 million sequentially, miles ahead of its guidance for 2 million quarterly additions.
If that weren’t enough, a fourth metric, fourth-quarter guidance, also blew expectations out of the water. NFLX expects to add 5.2 million subscribers globally in the fourth quarter, 1.45 million in the U.S. and the remaining 3.75 million abroad. Both were far better than the 4.59 million FactSet consensus, which broke down to 1.27 million additions in the U.S. and 3.32 million overseas.
Netflix also guided for earnings per share of 13 cents in the fourth quarter, versus consensus estimates of 7 cents per share and revenue of $2.4 billion. Netflix did not provide a revenue outlook.
NFLX shares are coming off a killer 2015 in which the stock more than doubled and was the best performer in the Standard & Poor’s 500 index, but it’s been a much cooler commodity in 2016. Through the close of trading on Monday, Netflix shares were down more than 12 percent for the calendar year.
Those losses were erased after Monday’s report.
Much of the poor performance before third-quarter numbers was a result of an incredibly disappointing second quarter in which the company fell far short of subscriber growth that analysts predicted. That quarter, which ended in July, saw Netflix miss even its own subscriber estimates, which called for a total of 2.5 million new subscribers. It added 1.7 million instead, and shares instantly lost 15 percent of their value.
[See: 7 Questions Investors Should Ask About Stock Earnings Estimates.]
With the Netflix subscriber base in the U.S. reaching near-saturation levels, the focus from here on out will be on international expansion, as well as something called “localization,” the production of specific content for specific markets, based on the local language and its cultural preferences.
As far as international expansion is concerned, the next big goal is to “infiltrate China by licensing content to local providers,” explains K C Ma, professor of finance at Stetson University. “It is not necessarily smooth sailing, after Disney’s ( DIS) Alibaba ( BABA) collaboration and Apple’s ( AAPL) movie service have failed in China.”
The focus on international growth — Netflix pushed into 130 new countries at the beginning of the year — as well as localization and continued licensing agreements, mean Netflix’s costs will likely keep soaring as it seeks to finance its ambitious expansion. Cost of revenues increased 31 percent in the third quarter from the same period a year ago.
“Netflix is a capital-intensive company raising debt to fund its impressive original content. It needs that extra borrowed cash because it’s already running a negative free cash flow business,” says Barry Randall, technology portfolio manager for Covestor.
[See: 7 Ways to Tell a Stock Is a Good Price.]
As for valuation, NFLX stock still isn’t cheap. “Netflix’s price-to-2017 earnings ratio of about 120 isn’t just high — it’s hypoxic. With Netflix’s volatile stock price history, that valuation tension might not be resolved painlessly,” Randall says.
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Netflix (NFLX) Stock Rockets Higher on Blowout Third-Quarter Earnings originally appeared on usnews.com
