It's so hard to be a Wall Street darling these days.
The numbers are decent. The company's subscriber count topped the 8.2 million mark, growing 21% over last year's tally. Any bears who were still clinging to the sequential member dip during last year's second quarter as part of a pessimistic thesis can move on to another picnic basket. Netflix continues to grow in popularity, and that's unlikely to change in the near term.
Revenue climbed just 7% to $326.2 million. It's a smidgen below the market's expectations, but that's not entirely fatal. Revenue was supposed to grow at a far slower pace than subscriber growth because of last July's fee cut, when it was locked in a pricing war with Blockbuster's
Earnings rose by 36% during the period, or up 50% on a per-share basis, to $0.21. Operating margins improved despite last summer's pricing moves. Now that the Blockbuster alternative is a less savory proposition for film buffs, churn and subscriber acquisition costs are dropping nicely.
The case for Netflix
Even during these challenging economic times, Netflix managed to close out the quarter with 764,000 more subscribers than it had three months earlier.
The company's strength in a trying environment isn't a surprise. I singled out the company as a recession-resistant consumer stock last month. Higher gas prices are making a trip out to the video store a drag. Penny-pinching consumers staying home still need to be entertained. Netflix is there to save the day.
Even if you argue that the DVD platform's days are numbered, Netflix is making inroads into digital delivery. Beyond streaming a small fraction of its catalog online, Netflix has been working with consumer electronics companies to transport films straight into your living room.
"We have LG plus three additional partners actively working on integrating our technology into their products," CEO Reed Hastings said during last night's call. He went on to say that two of the unannounced partners are major companies that "sell millions of devices per year and will enable the Netflix functionality in some of those devices likely in the fourth quarter of this year."
My money is on TiVo
The Blu-ray rollout will buy disc-based distribution a couple of more years, but Netflix is clearly jockeying to be a leader in the digitally delivered future. Apple
The case against Netflix
Not everything is rosy in Netflixland. The company once again improved its projections for year-end memberships -- now expecting to close out 2008 with 9.1 million to 9.7 million subscribers -- but this is also the second time Netflix raised its guidance while keeping its net income estimate unchanged. This is also the second time that the company's revenue update showed smaller spurts than its subscriber base tally.
This implies several things.
- Revenue guidance isn't rising as quickly as subscriber targets, because new customers are either signing up for lower-priced plans or aim to come onboard later in the year.
- Margins will be tested as the company fleshes out its digital delivery products.
- Revenue-enhancing initiatives, like charging a premium for Blu-ray rentals in the future, or the possibility of pushing premium-priced rentals beyond the company's limited library of free streaming flicks, will likely be immaterial in the near term.
Netflix is no slouch, but it also wasn't cheap as of yesterday's close -- trading at more than 34 times its lowered expectations of $1.16 a share to $1.29 a share in earnings this year. The growth is there. The subscribers keep coming. However, digital delivery will prove to be a far tougher kingdom to rule over as the low-cost leader. It's not just a matter of flicking away Wal-Mart
However, there's still a long time to go before the cops crash the party. Between now and then, Hastings is too sharp to take anything for granted.
I'll take the hit today as a Netflix shareholder. In fact, I expected it. However, as far as fallen darlings go, I expect Netflix to be back within the market's good graces soon, especially as it announces the unannounced -- cough, cough -- partnerships in the coming months.
Netflix, Apple, and Amazon.com are recommendations for Motley Fool Stock Advisor newsletter subscribers. Microsoft and Wal-Mart are Inside Value recommendations. You want a price break? A 30-day free trial subscription will take you there.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.