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How Netflix, Inc. Wowed Shareholders

By Anders Bylund - Jan 21, 2015 at 9:27AM

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Shares rose more than 15% after a mixed fourth-quarter report, which also delivered a ton of positive updates on the streaming business model. Here's what you need to know.

Image source: Netflix.

Did Netflix (NFLX 1.50%) scare you away from its stock in October, when it looked like the company's breakneck subscriber growth was about to hit a brick wall? You can come back now. Netflix is back in a big way.

Netflix yesterday reported results for the fourth quarter of 2014. Management's subscriber forecasts were a little bit off again, but this time on the low side. The digital-media veteran added 1.9 million domestic customers this quarter, alongside 2.4 million overseas accounts. All told, that's 8% more than the official guidance offered in October.

Total sales rose 27% year over year to $1.4 billion. Netflix delivered stronger international margins than expected, plus a one-time release of tax reserves as long-running tax audits finally closed. Backing out that positive tax effect, bottom-line earnings landed at $0.72 per share.

For the record, analysts were looking for adjusted earnings near $0.45 per share on $1.5 billion in revenue, making it a mixed quarter in terms of the basic numbers.

But that's not why Netflix shares jumped more than 15% higher in after-hours trading Tuesday. The real rocket fuel wasn't measured in plain numbers.

Netflix CEO Reed Hastings has big expansion plans in mind. Image source: Netflix earnings videos.

The fundamental business model is turning out even stronger than Netflix's own management had expected. The company now expects to complete its global expansion in two years while staying profitable. Let me be clear: Netflix intends to offer streaming services in nearly 200 countries by the end of 2016. That's up from about 50 countries today. According to the United Nations, there are 206 sovereign nations in the world today, including minnows like Monaco, Vatican City, and Tuvalu.

We're talking about universal coverage here. Politically problematic nations like Sudan or China may have just a vestige of the full Netflix service by 2017, and adoption will be slow where broadband service is rare, but there should be something there.

Keep in mind that Netflix recently painted expansion targets on a much smaller slice of the globe for 2015. The company is expanding fast enough to shock even long-standing bulls like myself. I recently said that Netflix will reach every corner of the world by 2019 or so. CEO Reed Hastings now wants to beat my deadline by a two-year margin.

Again, all of this explosive growth will happen while also delivering positive annual earnings along the way, according to the company. Then, in 2017, the focus will shift from imperialistic territory growth to profit growth. This company is going places -- and so is its investor value.

But wait -- there's more!
That's not the whole story, either. Let me share a few whoppers while you think about the international expansion opportunity:

  • We now know for the first time that Netflix original series offer more bang for the viewership buck than licensed content, which explains why the company is pouring so much money into its original production efforts.
  • Streaming content obligations rose 30% year over year and now sit at $9.5 billion in the most recent quarter. Meanwhile, global streaming revenues increased by 35%. In other words, content costs are rising -- but slower than revenues, which points to stronger profitability in the long term.
  • In October, CFO David Wells speculated that subscriber growth might have stalled because of the price increase Netflix launched in the spring. Three months later, with more data to digest, Netflix sees stronger growth in low-income regions, which would not be the case if consumers were sensitive to modest price increases.
  • In a video call with analysts, Hastings dodged a question about total hours viewed but delivered this valuable insight about rising viewer engagement instead: "Median hours continue to climb in every market as we make the programming better and better. That's the main thing that we track internally."
  • So the average Netflix viewer is spending more time with the service than ever, in every single market. It's always good to know what management is aiming for, and this looks like a reasonable metric for weighing the value of a digital subscription service.

That's the kind of report it takes to lift Netflix shares substantially higher in a matter of minutes. The roller-coaster ride will continue, and there will be more speed bumps like that terrible third-quarter report along the way. But in the long run, Netflix is becoming a global media powerhouse. Keep an eye out for big price drops in the meantime, because they can open terrific buy-in windows.

Anders Bylund owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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