Netflix (NFLX -0.35%) delivered a truly spectacular earnings report on Wednesday, and the stock exploded higher by more than 17% on Thursday morning. It's been one hell of a ride for investors in the streaming company over the last several years, but the past is only prologue. Should you buy Netflix now or is the best part over for the company?
Firing on all cylinders
Saying that Netflix's latest earnings report was "better than expected" could be an understatement. The company is clearly performing remarkably well across the board in terms of both financial figures and subscriber growth.
Sales during the fourth quarter of 2013 came in at $1.18 billion, a 24% increase versus a year earlier and a bit better than the $1.17 billion forecast on average by Wall Street analysts. Earnings per share were much higher than expected by analysts: Netflix earned $0.79 per share during the quarter versus an average estimate of $0.65 per share; this was also a substantial increase versus $0.13 per share in the fourth quarter of 2012.
Perhaps more important, subscriber growth was well above the company's own forecasts for the quarter: Netflix added 2.33 million net U.S. streaming subscribers, beating its target of 2 million. The company also gained 1.74 million international streaming members, much better than its guidance for the period of 1.3 million. Netflix finished 2013 with 33.42 million domestic subscribers and 10.93 million international subscribers, for a total of 44.35 million.
Profitability is also moving in the right direction, domestic contribution margin during the quarter increased by 420 basis points year over year to 23.4%, and management expects to reach the company's goal of a 30% contribution margin by 2015.
Even in international markets, where Netflix is still in its initial stages and investing heavily for growth, it reported a reduced contribution loss of 25.9% versus a contribution loss of 103.2% in the last quarter of 2012.
The company is forecasting to add 2.25 million U.S. subscribers and 1.6 million international subscribers in the first quarter of 2014. Contribution margins are also expected to continue improving, with the U.S. generating a positive contribution margin of 24.9% and international markets reducing their losses to a negative 15.7%.
The future looks good
One of the major concerns shared by investors and analysts when it comes to investing in Netflix is the always challenging and dynamic competitive landscape. But it's also important to remember that more players in the industry also mean a growing market for online video as a whole. From the company's letter to shareholders:
Our domestic growth is very strong, much of which should be attributed to the tailwind of Internet video growth in general. Hulu had 3 CEOs in 2013, and yet grew paid subscribers an impressive 65%. We think YouTube, Amazon Instant Video, iTunes video and BBC iPlayer are also growing fast.
Amazon.com is a particularly challenging threat. The company has built a massive library of digital video, with more than 40,000 movies and TV shows, and it has recently started putting some marketing muscle behind its Prime Instant online video service.
On the other hand, online video streaming is a high-growth business offering outstanding opportunities for growth in the coming years. There should be more than enough room for Netflix, Amazon, and many other players to thrive and grow over time.
Besides, exclusive high-quality content provides a big differentiating factor for Netflix. The company's original series have received 80 major awards and nominations so far, and the pipeline is looking really exciting.
Netflix is launching new episodes of winners like House of Cards, Orange Is the New Black, and The Killing, among others, during 2014. It is also launching its first animated series for adults, called the BoJack Horseman, an epic series based on the adventures of Marco Polo, and additional new series for kids from DreamWorks Animation.
These are just a few noteworthy examples of coming launches. Content is king, and Netflix has proven to both viewers and investors that it has what it takes to create, purchase, and deliver high-quality content on its platform.
Bottom line: Should you buy?
Netflix is a particularly volatile stock, and it's now trading at a P/E ratio of more than 50 times earnings estimates for 2015, so it's certainly priced for growth and vulnerable to any disappointment in the short term. Netflix is probably not the best name for low-risk investors who prefer stable and predictable companies.
On the other hand, Netflix is clearly firing on all cylinders, and the future is looking brighter than ever. With a rapidly growing subscriber base, improving profitability and a unique library of content differentiating the company from the competition, it is well positioned to continue delivering extraordinary growth for investors over years to come.
