Netflix - A Speculative Trade Even If Shares Soar After Beating Estimates

| About: Netflix, Inc. (NFLX)

(Note: This article has been corrected from the original.)

Netflix (NYSE: NFLX) shares jumped for the second time this year after releasing its first quarter earnings that beat estimates. It reported earnings per share for the fiscal year 2012 at $0.31 beating Wall Street estimates at $0.19 per share. Revenue for the 1st quarter also increased from $945.24 million to $1.024 billion. This also beats the analysts' expectations of $1.01 billion.

The triumph on the trading floor was further boosted when Netflix reported the addition of 2 million subscribers. This will now put Netflix almost at par with HBO. The premium cable channel of Time Warner (NYSE: TWX) has 28.7 million paid US subscribers as of the end of the year 2012. Netflix, on the other hand, has amassed 27.9 million paid streaming subscribers. But if you include the free promotions, Netflix has already beat HBO with 29.2 million paying and non-paying subscribers.

This is a bias assessment since HBO's numbers are a quarter behind. But even if HBO releases its own first quarter data that shows the addition of more subscribers that keep it ahead of Netflix, the gap would be close enough for Netflix to overtake HBO probably in the next quarter or two.

The recent jump of Netflix was fueled by growing investors' confidence on the company. But some analysts are still skeptical of the recent rally. The latest earnings report showed growth in some major aspects like the domestic and international revenue, total streaming contribution profits, and consolidated operating income. However, there was also negative growth in several key critical areas.

One of them is the net income, which saw a very disappointing 65.95% decrease from $7.897 million in the previous quarter to $2.689 million. This should put the company in a bad spotlight. But the decline in revenue was expected. Wall Street analysts even pegged the revenue at a level lower than its actual performance. Aside from that, the negative growth versus the previous quarter was overwhelmed by its growth over the same quarter the previous year, which saw a net loss.

The optimism was further boosted by the dramatic increase in the number of total domestic streaming paid subscribers from 25.471 million to 27.913 million. This is an additional 2.442 million paid members that will give the company recurring monthly income. On an annual basis, Netflix reported net income of $17.152 million in 2012, down from the $226.126 million in 2011 or a negative growth of 92.41%.

In the balance sheet, the figures are likewise unsatisfactory. Total liabilities considerably increased from $3.091 billion in the last quarter of 2012 to $3.550 billion in the first quarter of 2013. During the 3rd quarter of 2012, the total liabilities were only $2.79 billion. While the liabilities are in billions, Netflix's cash and cash equivalents are only in millions at $418 million. Its Non GAAP free cash flow is a dismal -$41.511 million. So with net income down while the free cash flow is negative amid increasing liabilities, Netflix's current position is still unreliable for long term investment.

Share Performance of Netflix

The fiscal year 2013 is one of the best years for Netflix. Its year-to-date growth is a whopping 135.33%. That's more than double your money in less than 5 months. For those who bought NFLX stock on October 24, 2012 at $60.12 per share, they have more than tripled their investment at 261% growth.

As earlier mentioned, NFLX made two major jumps this year; the first jump was even higher than the recent one. It occurred on January 24 when the shares climbed by 42.22% from $103.26 to $146.86, gaining $42.54 per share in a single day. The rally came after Netflix released its 4th quarter and full year 2012 financials showing significant increase in the number of subscribers.

The second and the most recent jump came after Netflix released its first quarter earnings. So there seems to be a pattern here for this year's performance of NFLX. The rallies occurred after releasing the company's quarter earnings reports.

Netflix may be successful in attracting more customers, but if they don't manage their finances well then what happened to NFLX shares before may probably happen again. Back in September 2011, the shares took a direct hit when Netflix increased its subscription prices by as much as 60%. It was met with outrage among the subscribers, leading to about 800,000 subscribers lost.

NFLX shares were greatly affected, causing a major plunge from $208.71 to $169.25. In a day, it lost $39.46 per share or a decrease by 18.9%. The price further slid to $128.53 after a week, shedding off 38.41% in less than two weeks. But a year later, shares have corrected starting September 2012 and the rally persists and getting even stronger to-date.


There are many reasons to remain upbeat for Netflix. Aside from having a continuously growing subscribers base, it also has increasing number of popular episodes. These shows further boosted Netflix's subscriptions like the House of Cards. Recently, it started airing Hemlock Grove. The next season of its comedy series, Arrested Development, will also be launched probably by May.

However, there are also reasons to be skeptical. The financials are not that great, particularly the decreasing net income and the increasing liabilities. With a market capitalization of $12.13 billion, Netflix is a good stock for speculative trading with great potentials to make remarkable gains within just a short span of time. But it is not ideal for long-term investment. So basically it is not a stock to watch for if you are a conservative investor.

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

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