Netflix Inc. (NFLX) released its fourth quarter results in January. To analysts' surprise Netflix, beat the forecast for both subscriber growth and profits. Net income was $0.13 per share as opposed to analysts' estimate of a loss of $0.07 per share which sent its stock skyrocketing by 73.36% between 23rd and 25th January to $169.60. This is the organization's biggest gain since the time it went public in May 2002. A report like this may finally dissipate the storm clouds that have been hanging over Netflix since the Quikster debacle in 2011 and prove that its longer-game strategy of moving into content creation is working.
For that to work subscriptions need to rise, which they did during the quarter, by 2.05 million in the U.S. and 1.8 million internationally. The U.S. subscriber base is now 27.2 million - 7.6% growth - while international accounts rose by 29.4% to 6.12 million. Netflix was itself expecting to add between 1.3 million and 2 million new customers during the quarter. Losses from its international division were $105 million and are expected to drop to $87 million in Q1 2013 and continue dropping throughout the year.
This puts the subscriber base at 33.4 million streaming accounts around the world and has 8.22 million subscribers on the mail order side of the business. Streaming subscriber growth was all told was 13.1% which is a far lower margin business than its DVD business and one of the main reasons why Netflix has been the punching bag of the hedge fund set for the past two years.
So, when Netflix reports total quarterly earnings of $7.9 million coming from revenues of $945 million as sales climbed 4.4% sequentially, it should only further reinforce the lowered expectations. The stock has rallied hard on both the ebullient atmosphere surrounding stocks and some short covering. But, Netflix still has not improved its high customer acquisition cost model. Bowing to reality is one thing -- streaming is the future of media consumption -- but investors necessarily paying a premium for it is another. Or should they?
The Disney Strategem
Netflix's recent deal with Disney (DIS) signals the future strategic direction of the company. Previously, the streaming story was centered on exclusivity driving subscriber growth, but that model is way too expensive. Content distribution is a commodity model, a fact that all the major cable and fiber operators like Time-Warner (TWX) refuse to completely accept, or at least will fight the evolution of for as long as they can. Netflix and Disney make a perfect partnership as Disney has embraced this by buying up all of the major content producing brands, the recent Lucasfilm acquisition is one the extreme example of this.
And content creation is where Netflix is hoping to stave off the margin erosion that has been dogging the stock. Its new series "House of Cards" debuted on 1st February. The new incarnation of cult classic "Arrested Development" is set to debut in May - releasing all 14 episodes at once like it has done previously. The plan is simple -- moving from exclusive content to original programming. This is where the competition in the future will be. This was laid down clearly by the company's executives when they said that in the long run, the businesses (Netflix, HBO Go, Redbox, etc.) will be competing "more like [how] Showtime and HBO do today," The cable giants are hampered by their status with the FCC, whereas Netflix, and others like Hulu and Amazon (AMZN) are not. It came as zero shock to me that Amazon, for example, will be getting into original programming after playing catch up with its Prime video service by breaking down Netflix's exclusivity with Epix.
I'd rather not go into a speculation of a Netflix/Disney merger but the path is being laid out that some players in this space are pushing into this path that Netflix began clearing two years ago. The streaming players like Netflix and Amazon have so much better user preference information and can leverage big data techniques to develop content that will have higher overall return on invested capital than the traditional model. It is simply a numbers game. Yes, there are a handful of big titles that drive huge viewing numbers. But, in between those big releases are the every day viewing habits and those data points are the ones that previously could not be placed to a face. Do you still believe Disney cares about its cable channel when it can now get far higher quality data about its customers by putting its content on Netflix?
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.