Are You Worth Less Than 50 Cents To Netflix?

Aug. 1.14 | About: Netflix, Inc. (NFLX)


Netflix announced quarterly earnings and offered visibility into its per customer revenue contribution.

A look at the value of the customer shows why the stock held onto its recent 40% gain.

The bulk of the price increase will go towards content creation building an asset rather than increasing margins.

Netflix Inc (NASDAQ:NFLX) announced quarterly results that were in line with high expectations. Shares traded off, but that could have been expected. The share price was up 40% since the announcement of the price increase in early May after all. A close look at the numbers offers visibility into how much Netflix makes from you as a customer. Surprisingly, its only $0.44 but moving in the right direction and shows why shares of Netflix may make a good investment as profitability continues to improve.

Competition is barking at Netflix's heels from (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) and the company needs to establish itself as a differentiated service at a time when the internet giants are all competing on every front. Let's take a look at the quarterly results, competition and user stats to see just how much you are helping Netflix stave off the giants.

Quick review of the quarter
Netflix announced results that were in line with expectations: $1.34 billion in revenue and $1.15 of earnings per share. More importantly, Reed Hastings, the company's CEO stated that the impact from the price increase has been digested and it was negligible. In 2011, the last time the company tried to raise prices, it was handled improperly and customer defections were so great that the company felt the need to sell debt to shore up the firm's finances. This time, instead of being hit with a 50% increase, the $1 increase after a year furlough was well accepted.

Even $1 higher, Netflix is less than movie popcorn
As cheap as the service is, the price increase brings to mind the level of profit that Netflix is making from consumers' monthly payments. Netflix receives $8.99 per month if you are a new, streaming only, customer. However, after the cost of manufacturing content, delivering DVDs and managing its infrastructure, how much does the company keep? It turns out that you and I are worth just 44 cents per month to the company. Don't feel bad though, that's up from just 2 cents, six quarters ago. ($71,018 in profit / 54,159 paying customers / 3 months in a quarter -- for a deeper dive into the numbers, check out our blog)

Reduction in DVD business will allow profit per customer to increase
This dramatic increase is the reason that the investment prospects are improving so rapidly. As a standalone figure $0.44 may not seem like a lot but when it's coming from the 54 million paying customers, it adds up. The amount of profit per customer is continuing to increase as well as DVD customers continuing to transition over to streaming only, so the company cuts back on delivery costs.

Competition is driving content creation across the industry
What Netflix does with the incremental profit is up in the air however. The increasing competition from, Google and Hulu are pushing Netflix to create more of its own content. On the call, Netflix highlighted that the buzz surrounding the second season of Orange is the New Black was greater than House of Cards. It sounds like the production quality is increasing as well, with a 10 episode season of Marco Polo being filmed on location on multiple continents. Amazon is creating its own content but it is also continuing to partner for a large portion. In particular, the partnership with HBO increases Amazon's content library by a meaningful amount adding "The HBO Collection" which includes hits such as The Sopranos, The Wire, Rome and Six Feet Under. The content generation is growing so quickly that Netflix was asked, "Do you feel you need your own studio?".

Google is getting into the game
Original programming appears to be the new ante to be in the game. According to Reuters, Google has been making the rounds in Hollywood over the last two months, approaching Hollywood producers directly to fund premium content development. Unlike Amazon and Netflix however, the Reuters report implies that Google will be more flexible about programming style, not necessarily tied into the 30 minute, broadcast quality programming that has been the form to date.

The increase in price is coming back to you as a customer
Netflix is instantly delivering access to a library of movies and TV shows for slightly more than the cost of a tub of popcorn (less if you are buying that popcorn in New York City). And you don't even get your hands greasy. Even though Netflix recently raised its monthly price, the bulk of your subscription gets reinvested in the business. As margins build, new content is likely to be announced and when we look at these numbers next year, consider how many pennies of your monthly bill went towards funding the new series, Marco Polo.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.