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Netflix Q3 Earnings Impress; Shares Jump

By Daniel Sparks - Oct 16, 2019 at 6:12PM

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The streaming-TV giant's revenue and profits are soaring.

Shares of Netflix (NFLX 6.16%) jumped during after-market hours on Wednesday. The stock was up about 8% as of 4:33 p.m. Eastern time during after-hours trading. The gain followed the company's third-quarter report, which boasted much better-than-expected earnings per share and strong growth in international subscribers.

Here's a closer look at the results -- and what's probably causing investors to respond optimistically to the report.

A group of young people watching TV

Image source: Getty Images.

Netflix's third-quarter earnings: What you should know

The streaming-TV company's third-quarter revenue came in at $5.3 billion, in line with management's guidance for the metric. That translated to 30% year-over-year growth.

Fueling this top-line momentum was a 19.2% year-over-year increase in streaming paid memberships. During Q3 specifically, Netflix added 6.8 million paid streaming members. While that's a nice uptick from to the 2.7 million paid streaming members the company added in Q2 and the 6.1 million it added in the third quarter of 2018, it was below the 7 million net paid member additions management had guided for during the period.

Where Netflix surprised, however, was with its earnings per share. Earnings per share during the period came in at $1.47, up from $0.89 in the year-ago quarter and far ahead of management's guidance for earnings per share of $1.04 during the period.

In addition, another reason for optimism may have been the company's 6.3 million net paid member additions internationally, above management's guidance for 6.2 million net additions.

Management talks competition

Finally, investors may have been happy with Netflix's discussion of the competitive environment. With new competition from Apple (AAPL 2.62%) and Walt Disney (DIS 3.98%) coming in November, investors were looking to the quarterly update to see management's latest thoughts on the intensifying landscape.

Management remains confident. "[O]ur long-term outlook on our business is unchanged," management noted when discussing the "forthcoming competition."

"There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance," management explained. "In the long term, though, we expect we'll continue to grow nicely given the strength of our service and the large market opportunity."

Even the near-term impact will probably be minimal -- at least according to management's guidance. The company said it expected to add 7.6 million paid members in Q4, down slightly from the 8.8 million paid members it added in the fourth quarter of 2018 but still robust, given that Apple's new streaming service is launching on Nov. 1 and Walt Disney's new streaming service is making its debut on Nov. 12.

Management also notably expects its operating margin to continue climbing, even in the face of growing competition. The company said it expects its operating margin to rise another 300 basis points in 2020, "consistent with the annual margin improvement we've delivered each year since 2017."

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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