Will Netflix’s Dream Run Continue?

Netflix  (NASDAQ: NFLX  ) , the world's leading Internet television site, has given investors a year-over-year return of almost 140%. Some analysts think that the company's heyday is over and it's heading toward maturity. Is this true, or will the company keep on growing? Let's analyze Netflix in detail and compare it to Time Warner's  (NYSE: TWX  )  HBO and Amazon (NASDAQ: AMZN  ) .

Netflix's fourth-quarter results
In the fourth quarter, Netflix reported earnings that were more than six times higher than what it earned last year. Net income for the quarter was $48 million or $0.79 per share, which beat the consensus estimate of $0.66, as reported by Reuters.

Revenue increased by more than 25% to $1.18 billion; this was attributed to strong international sales, which jumped 118% to $221.4 million. Domestic revenue also surged 25% to $740.6 million.

Operating income climbed 44% to $82.3 million, backed by strong top-line growth. Contribution margin improved by 490 basis points to 19.3% as the company managed to reduce its marketing and technology development costs.

In the US, more than 2.33 million new subscribers were added during the quarter; analysts expected the company to gain around 2.05 million new memberships. In the international market, Netflix managed to gain 1.74 million new subscribers.

What is Netflix up to?
During the quarter, Netflix invested in an upgrade of its interface in an effort to make the interface more user-friendly. Now, the interface displays more information about movies and serials and it allows users to easily browse the content of their choice.

Netflix has recently struck a $4 million deal with Disney's Marvel Entertainment which will enable Netflix to broadcast series of live-action adventures featuring Daredevil, Jessica Jones, Luke Cage, and Iron Fist. Filming for the series will start in summer this year, and the project will include 60 one-hour episodes. The partnership means that Netflix' subscribers will be able to stream these series' beginning in early 2015. Thanks to this agreement, the company will be able to add more subscribers in the future, as these series are based on some of Marvel's most famous and popular characters.

In addition, the company will continue to broadcast new seasons of its renowned series such as House of Cards, Orange is the New Black, Derek, Hemlock Grove, Lilyhammer, and Turbo F.A.S.T. It will also be launching its first original animated series for adults, BoJack Horseman, and a new series based on the adventures of Marco Polo.

Netflix has also rolled out its streaming application into Virgin Media's set-top box for UK members. Similarly, it has launched the same application across Denmark's Waoo! and Sweden's Com Hem network. The company is aggressively promoting its online media across Brazil and Canada, as these markets offer huge growth potential. Apart from this, Netflix will be investing in Europe as well, although the company hasn't disclosed the target markets there yet. The declining contribution losses from Netflix' international business segment show that the company is heading in the right direction.

Netflix is also testing variations of its current $8 monthly rate at various price points. The company will eventually offer three different sets of pricing options in order to cater to different users' demands and tastes.

In the first quarter of fiscal 2014, Netflix expects to add 2.25 million new subscribers in the US alongside 1.6 million members in the overseas market. Moreover, the company's anticipated per-share earnings stand at $0.78; analysts' consensus estimate is $0.75.

Industry peers
HBO, a wholly owned subsidiary of Time Warner, isn't a direct competitor to Netflix. However, Netflix's recent success with its subscription-TV service is seen as a big threat to the premium cable channel.

According to The Wall Street Journal, HBO is responsible for 50% of a typical $16 monthly bill, which is almost the same as Netflix's revenue per user. However, pay-TV operators handle billing, customer service, and even marketing for HBO; Netflix manages all of these functions for itself. Therefore, HBO usually posts larger profits than Netflix does.

However, HBO's growth in the latest quarter shrank as its net profit fell 4% to $413 million. For fiscal 2013, the company reported an operating profit of $1.8 billion while its revenue stood at $4.9 billion.

Amazon has recently said that it will soon be raising the membership price of Amazon Prime by $20 to $40; the current price is $79 per annum. Amazon Prime, which provides its customers free two-day shipping on millions of items along with unlimited instant streaming of thousands of movies and TV shows, has had great success in the past. If Amazon does this, its online video content will become far more expensive than that of Netflix. As a result, the company may well lose a lot of loyal members.

Final thoughts
Netflix once again reported a great quarterly performance as its revenue and membership base continued to rise. One of the most important things to note was the company's contribution loss in the international market, which continued to decrease. For this reason, the company is investing in Europe, Canada, and Latin America, as its expectations for these regions are still quite high. The recent agreement with Marvel Entertainment will make sure that Netflix keeps ahead of its competitors in the near future as well. Further, Netflix will certainly attract more members by introducing three different pricing options.

Taking all of this into account, I believe that Netflix's future looks prosperous, hence it provides a great investment opportunity at this point in time.

Can Netflix take over your tv?
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2014, at 9:54 PM, Fo45 wrote:

    This article is just making a point to buy Netflix but totally ignore the reality.

    - Netflix does not own any asset but easily duplicated streaming service and a bunch of leased shows the bill ($7 billion)amortized over many years.

    - what are the expenses with fierce competition. The price of content is skyrocketing, cost of content delivery undisclosed amount given by netflix to its competition.

    - The Author is comparing Netflix to HBO but surprisingly HBO will soon be owned by comcast . Do you think comcast will watch HBO becoming blockbuster video . The best argument to charge Netflix more is "net equality " while Netflix is unfairly using bandwidth and others have to experience slow Internet . To allow everyone to use the bandwidth equally ISPs need to build more infrastructure and Netflix needs to pay more. This will align Netflix pricing to HBO and we know HBO has 20/1 original shows compared to Netflix. Netflix can not threaten with regulators and Net neutrality because net equality involve everyone and regulators will be careful dealing with the issue.

    - Going to non English speaking countries is not the same as English speaking one. it is why the success has been marginal in Latin America. France and Germany are not England, they have tougher regulations and different culture.

  • Report this Comment On March 05, 2014, at 1:12 PM, sliderw wrote:

    @Fo45

    HBO is owned by Time Warner. Comcast is buying Time Warner Cable, not Time Warner. They are two unaffiliated companies with similar names.

  • Report this Comment On March 06, 2014, at 11:59 AM, tenaciousdeucer wrote:

    Fo45-

    NetFlix currently does what it does so much better than the competition that the competition doesn't even try to compete directly with them. The comps are all smaller niche providers in comparison.

    No one offers that much content at that price point. The overwhelming market share NF enjoys makes them just as important to content providers as the content is to NF.

    I'm not saying the tables can't turn but that is a lot of ground to make up for any current or foreseeable competitor to even come close - NF would have to really screw themselves at this point.

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