Can Netflix Continue its Meteoric Rise? *UPDATED*

Jacob Harper |

Netflix Inc. (NFLX) will deliver its earnings report after the bell on July 22, and analysts expect Netflix’ good fortune to continue. As a brand, Netflix is hot, with its stock hitting  264.58 a share before trading, an over seventeen fold rise since the company had its IPO in 2002 for $15 a share. Netflix now has a market cap of 14.85 billion, over 29 million subscribers, and has become the unquestioned leader in internet video streaming.

Netflix isn’t just in the business of streaming other’s content now, though, and have begun working to cut out the middleman and, like HBO, produce in-house content. They’ve produced nine original shows to date. And they've quickly garnered the company legitimacy. Netflix was recently given a major stamp of approval on their content division: the company received 14 Emmy nominations, a first for content that doesn’t appear first on traditional television.

The history of the company hasn’t been entirely rosy, however. In 2011 CEO Reed Hastings made a very embarrassing and costly blunder when he announced that he would separate the dwindling DVD shipping service off of Netflix and form a separate company called Qwikster. Subscribers who wanted streaming and shipping would be required to buy into both companies. The move was met with derision, and the plan was scuttled before it even got off the ground. The stock in turn tanked, dropping from a price of $295.14 on July 4 to $63 dollars a share on November 25.

The stock languished most of 2012, but then began a rapid recovery, in part because of their renewed focus on original programming, and that recovery has so far continued unabated. The question, as it is with any high-flying property, is when the correction will happen, and how sever it will be. Netflix has beaten expectations the last two quarters, as earnings have continued to exponentially increase. Now it’s a matter of seeing if they can keep it up, or if they're due for another 2011-style plunge.

Before the earnings report comes in we thought we’d look at Netflix’ history, what analysts expect this quarter, what the shift to being a ‘major TV player’ means to a company that isn’t even in TV, and whether that is enough to keep Netflix from having another crash.

From DVD Library to Streaming Service to Burgeoning Studio

The Los Gatos, Ca.-based company was founded in 1997 when Reed Hastings, who had previously made a fortune in software, invested 2.5 million in a new service that would challenge then DVD rental king Blockbuster. As time wore on, the moved from being a traditional rental outlet (albeit by mail) to one that allowed unlimited rentals and a flat monthly service fee.

After the company went public in 2002, their business exploded. Although they didn’t turn a profit until 2003, they were already doing over $270 million a year in subscription fees, and the number grew every year.

In 2007, they made perhaps their biggest move, as they transitioned into video streaming. Viewers now didn’t have to wait until their DVDs came in the mail. They could watch immediately. This proved to be the first step in a model that challenged not just movie rental places like Blockbuster. But with a focus on original programming they challenged movie studios as well. And in the delivery of their product directly to viewers, they challenged the entire television industry.

The Shift into Original Content       

Netflix made their first foray into financing original content with a little seen horror webisode Splatter. After that, in 2012 they made a big push with the moderately successful Lilyhammer. But their $100 million gamble on political drama House of Cards is what established Netflix as a major player in content creation. The show received broad critical acclaim, and garnered eight Primetime Emmy nominations. House of Cards was followed by the moderately successful Arrested Development and Hemlock Grove and the just-debuted sensation Orange is the New Black. But House of Cards, and it’s eight nominations (Grove and Development got two and one nominations apiece, respectively) made Netflix’ move into content look like more than a side business. It looked like it could be a focal point to spur newfound growth.

For stockholders, though, Emmys are of little interest. The question is, did the original content bring in more subscribers?

Analyst Expectations

Netflix has been the top performer in the S&P 500 in 2013 and it's also the second most expensive behind only Google Inc. (GOOG) . Many analysts see a disonnace in this, and expect NEtflix to come back to Earth. Sanford C. Bernstein & Co. analyst Carlos Kirjner calls for a price point target of $180. But Barton Crockett of Lazard Capital Markets thinks the original content brought in the subscribers necessary to sustain Netlfix' upwards mobility, and thinks Netflix will at least beat analysts expectations. 

Analyst consensus has Netflix soldily in the black regardless. Netflix almost certainly added subscribers, and might crack 30 million.  Wedbush Securities analyst Michael Pachter thinks they could even top 30.5 million subscribers, which would be seen as an absolute triumph of the original content strategy

Netflix announces earnings via live streaming at 6 PM July 22.

Q2 EARNINGS UPDATE

OIn their second quarter 2103 earnings report, Netflix met analyst expectations, yet the price of their stock still dropped.

Netflix reported net income of $29 million, or $0.49 per share, versus the $6 million, or $0.11 per share, from the same period a year ago. Revenue for the quarter was $1.07 billion, as compared to $889 million from the previous year. Analysts were expecting a profit of $0.40 per share on revenues of $1.079 billion.

The company added 630,00 subscribers, which was under analyst hopes. Netflix themselves stated they expected between 230,000 and 880,000 new subscribers, while more bullish analysts called for over a million. This shortfall could be part fo the reason that despite earnings hitting expectations, Netflix stock plummeted 6.76 percent after trading on the news to hit $244.43. Some analysts have already begun whispering that this is indicative that Netflix' stock rise might indeed be a bubble.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GOOG Alphabet Inc. 750.50 2.58 0.34 1,452,484
NFLX Netflix Inc. 120.81 3.59 3.06 8,953,590
MARUY Marubeni Corp. ADR 56.14 0.00 0.00 84

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