Why Netflix, Inc. Stock Skyrocketed

The video streamer took off on strong subscriber numbers in its earnings report. Here's what you need to know.

Jan 23, 2014 at 4:35PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Netflix (NASDAQ:NFLX) gained as much as 19% after the leading video streamer listed blockbuster subscriber numbers in its fourth-quarter report.

So what: Netflix tacked on 2.33 million new domestic subscribers in the closing three months of 2013, better than the 2.05 million it added in the year-ago quarter, showing that its already strong growth rate is getting even better. Earnings per share grew more than six times to $0.79 from $0.13 a year ago, beating estimates of $0.66, while revenue of $1.18 billion was essentially in line with expectations. Management guided the current quarter's EPS at $0.78, also matching estimates. The winter months are Netflix's strongest, and the company expects to add another 2.25 million domestic subscribers in the current quarter.

Now what: It's hard to doubt Netflix's dominance in the video-streaming industry. The company pioneered the business model with mail-order DVDs, and it's now successfully navigated the transition to streaming with the biggest library and the greatest subscriber base, bringing a serious threat to premium cable channels such as HBO and Showtime along the way. But while the business is strong, the stock is dearly priced, commanding a forward P/E of 100. Investors may want to consider how long Netflix can grow at this pace before jumping on the bandwagon.

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Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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