Netflix Inc. (NASDAQ:NFLX) – Strong Result, Can Netflix Hold Aloft?

Edited by Vani Rao

Netflix Inc.’s stock is once again creating a buzz following the announcement of better than expected results, a three-fold rise in Q3 revenue, and strong projections for its Q42013 earnings. Netflix’s stock saw a 6.44% surge to $354.99 during Monday’s market hours and over 11% spike in after-hour trading. So far this year, the stock has grown by more than 283%, catapulting it to a very strong position in Q42013.

 Source: Bloomberg
Source: Bloomberg

For Q3 2013, Netflix reported net income of $32 million, or 52 cents per share, 300% higher compared to net income of $8 million, or 13 cents per share, for the same period last year. Domestic net streaming additions surged from 0.63 million in Q22013 and 1.16 million in Q32012 to 1.3 million in Q32013.

 Source: Netflix
Source: Netflix
 Source: Netflix
Source: Netflix

The company has further projected domestic net streaming additions to rise to 2.01 million in Q42013. This sends out a very strong signal to investors about Netflix’s growth potential, although the company remained conservative while projecting international additions.

International net additions rose from 0.69 million in Q32012 to1.4 million as of Q32013, mostly driven by the company’s expansion into the Nordics and the Netherlands since last Q32012.

On another note, a major concern for Netflix is its contribution margins. In the domestic streaming business, the company reported contribution margin of 23.7% for Q32013 similar to 22.5% for Q22013 and lesser than the earlier estimated contribution margin of 23.8% for Q32013. Also, the company lowered its contribution margin estimate to 23.2% for Q42013.

 Source: Netflix
Source: Netflix

During Q32013, Netflix launched several new advertising campaigns in the Netherlands, a number of Nordic countries and Brazil, with further plans to explore new markets in 2014. The company believes that the net addition to domestic markets indicates a substantial momentum in favor. It has also partnered with Virgin Media, UK’s leading cable company, to allow its customers to access Netflix through TiVo set-top boxes.

Further to our prior coverage, WSA continues to believe that the growth in Smart TV, Internet TV devices such as AppleTV, Roku, and Chromecast, smartphones, tablets and on-demand internet streaming through cable set-up boxes can make streaming available to every household. With expansion into new geographies and increased focus on marketing, we think that Netflix could have made a very good investment opinion. However, WSA also believes that the stock has already factored in most of the positive developments in the last few quarters. Hence, we maintain a Neutral stance at current levels with a price target of $360.

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