Netflix Rings In Happy New Year

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Stock investors are probably scolding their portfolios this morning, asking, "Why can't you be more like Netflix (Nasdaq: NFLX  ) ?"

The DVD rental specialist delivered a monster quarter last night. Fourth-quarter revenue climbed 19% to $359.6 million. Earnings grew even faster, as Netflix posted a profit of $0.38 a share (after earning just $0.23 a share a year earlier). Analysts figured that Netflix would only earn $0.34 a share on $354.2 million in revenue.

The market should be used to eating Netflix's dust. The company has beaten bottom-line expectations in six of the past seven quarters. Most impressively, both revenue and earnings growth accelerated during the period, with the company scoring bigger gains during the quarter than it did through the first nine months of 2008.

The key driver here is the company's surge in popularity. Netflix attracted 718,000 net subscribers quarter over quarter, during a period in which too many companies' customer bases shrank. Netflix is wrapping up 2008 with nearly 9.4 million subscribers, a 26% boost from the 7.5 million movie buffs it served a year ago.

How Netflix punked the pros
Back in October, Netflix spooked investors, hosing down previous guidance that had called for as many as 9.7 million accounts by the end of 2008. Netflix's new outlook found the company projecting just 8.95 million to 9.25 million subscribers by the quarter's end. Two weeks later, the company stepped even harder on the brakes, now predicting that it would close out the year with 8.85 million to 9.15 million members.

Netflix didn't lie to its investors. Things probably seemed that grim back in October. However, the company held back on updating its shareholders as its prospects improved.

The good news is sprinkled everywhere in the company's report. Subscriber acquisition costs fell to $26.67 per gross addition, well below the $34.58 average a year ago. Churn held steady at 4.2%. Free cash flow more than doubled to $51 million. The company is even initiating a $175 million share buyback, even though the stock was one of the few consumer-facing companies -- like McDonald's (NYSE: MCD  ) and Wal-Mart (NYSE: WMT  ) -- to post price gains last year.

The way consumers warmed to Netflix as the economy weakened is comforting. DVD rental chains like Netflix and Blockbuster (NYSE: BBI  ) offer a lot of bang for the entertainment buck.

Netflix expects the growth to continue, predicting revenue of $1.58 billion to $1.635 billion this year, on earnings between $1.43 a share and $1.59 a share. It expects to close out the year with 10.6 million to 11.3 million subscribers.

Most leisure companies will be hard-pressed to grow their user bases if the economy continues to sour, yet subscription-based companies like Netflix and Sirius XM Radio (Nasdaq: SIRI  ) are expecting to close out 2009 with more paying members. As long as the offerings are reasonably priced and the perceived value high, both companies should buck the recessionary trend. If the companies decide to pull a fast one on investors with wavy guidance along the way, that's their business.

Other Netflix-ish headlines:

Wal-Mart is a Motley Fool Inside Value pick. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. There's never a Very Long Wait for the Fool's disclosure policy.

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  • Report this Comment On February 01, 2009, at 11:58 AM, MedPeddler wrote:

    Netflix has alot going for it in times like these. For a family of four, a movie with snacks in my area can cost close to $40. That eats alot of the entertainment budget. An unlimited plan on Netflix costs less than half that every month. I think alot of families are saying they can wait for movies to come out on DVD, whether they're blockbusters or not. Add in the proliferation of HDTV and cheap home theater systems, and it's easy to see why Netflix is growing. You get great movies, cheaper snacks, family time, and no bozos bringing 3 year olds to Quantum of Solace.

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