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Why Netflix Shares Jumped

By Jeremy Bowman - Updated Nov 17, 2016 at 4:25PM

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Is this meaningful? Or just another movement?

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 video-streaming specialist Netflix (NFLX 1.98%) were screaming higher today, jumping as much as 26% after crushing earnings estimates for the second quarter in a row.

So what: Netflix said it added 2 million streaming customers in just the past three months, bringing its US total to 29.2 million, and management touted the lineup of exclusive content ahead following the critically acclaimed February premiere of House of Cards, the entertainment service's first exclusive series. Netflix's domestic streaming service also posted its best contribution margin since the company split the service from its DVD-by-mail segment at 20.6%. Its loss on international streaming shrank from $105 million in the quarter before to just $77 million as the number of paid members increased by more than 1.4 million to 6.33 million in the quarter before. Adjusting for a loss on extinguishment of debt, the company turned a profit of $0.31 a share, while analysts had projected just $0.18. Revenue also jumped 8% from the previous quarter to $1.024 billion.

Now what: This was certainly another strong quarter for Netflix, but the market seems to be getting a bit carried away here. Shares are up more than 250% since last fall, even though the home-entertainment provider still has little profits to show despite its recent subscriber growth. The company is also in the process of phasing its DVD-subscriber base, which contributed nearly as much profit as its streaming subscribers did in the last quarter, but with less than a third of the subscriber base. Keep an eye on international subscribers going forward as that seems to be where its true growth opportunities lie. If the company can grow the number of international subscribers at a pace of 5 million to 10 million a year or faster for the next few years, it may eventually be able to justify its lofty share price.

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