Most longtime Wall Street Daily readers know that I’ve been in Netflix’s (Nasdaq: NFLX) corner for a while now…
And it wasn’t always easy. Like when it raised the cost of its services in July… Or when its streaming video partner, Starz, decided not to renew its contract… And when the company planned to spin off its DVD business as a separate entity called Qwikster.
But once Netflix decided to ditch its Qwikster plans, I couldn’t defend it anymore.
Not because I was necessarily the biggest fan of the Qwikster idea – although I saw what the company was trying to do. But because the company, as it turns out, wasn’t 100% dedicated to the plan and never should have announced the spinoff to begin with.
It’s no wonder that the stock has plunged 80% since its high in July. After all, who wants to invest in a company that has zero idea what’s best for its business?
But now that the company announced positive fourth-quarter earnings last week, investors are beginning to change their tune.
The company’s $876 million in revenue beat the consensus estimate of $857 million. Earnings per share of $0.73 beat the projected $0.55, too. As a result, shares have blasted 37% since last week.
Of course, positive earnings can drive any stock higher in the short term. But has the company turned itself around enough to support a continued rally? Let’s take a look at what the company has going for it – and against – it right now…
First, the Good News
~ Subscribers on the Rise: The company reported that it lost 800,000 subscribers last quarter. But it has almost made up for the loss with 600,000 new customers signing on during the fourth quarter. For Netflix’s sake, let’s hope they stick around.
~ Expanding Content: With streaming subscribers on the rise, having more titles available for instant watch is more important than ever to retain the new blood. Netflix understands this, reporting that it has doubled its content expansion spending over the same quarter last year. And it expects to add new instantly streamable titles throughout the year.
~ Original Programming: The company’s rolling out its own original content with shows like “Lilyhammer” and “House of Cards.” And it announced that it’s bringing back the popular, yet cancelled, Fox series, “Arrested Development” in 2013.
~ Much-Needed Focus: During its earnings call with investors last week, Netflix’s CEO, Reed Hastings, was asked about the company’s practice of offering episodes of TV shows all together at the end of a season rather than while the show is airing. To which he replied, “To the degree that we try to be a substitute for cable networks by, for example, having current day content, then we get into a cord-cutting kind of battle that’s not really in our interest.”
Instead, the company is focusing on the idea that consumers are becoming more attracted to “binge viewing.” That is, watching an entire season in a row, rather than week to week.
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Granted, Hastings has always claimed that Netflix isn’t out to compete with pay TV (even though I think it does anyway). But the fact that the company is sticking to its guns here shows that it’s much more focused that it was earlier in the year.
Here’s the Bad News
~ What, No Video Games?: As I wrote in September, one of the biggest benefits of Netflix spinning off its DVD business was the addition of video games to its mailed offerings. Something Hastings mentioned would be a possibility in the future. But during the conference call last week, he said that they have zero plans to enter the video game space now that the Qwikster plans are dissolved.
~ Losing its Most Profitable Customers: Although streaming subscriptions grew, DVD subscriptions dwindled sharply from 13.93 million last quarter to 11.17 million in quarter four. And Hastings expects that trend to continue: “We expect DVD subscribers to decline steadily every quarter, forever.”
The problem is that its DVD business pulls in more profit per subscriber than streaming. As Wired pointed out, “Those DVD-by-mail subscriptions contributed $194 million of profit on only $370 million in revenue. Streaming, meanwhile, brings in $476 million in revenue, but only nets $52 million for Netflix’s bottom line.”
~ Competition is Ramping Up: With competing streaming video services from Amazon (Nasdaq: AMZN), Blockbuster and Wal-Mart (NYSE: WMT), Netflix isn’t the only guy in town anymore. RedBox is also working with Verizon (NYSE: VZ) to roll out another streaming movie and TV service this year.
Netflix also sees “TV Everywhere” offerings – which allow you to watch cable or satellite shows on mobile devices – as a major threat, too.
~ Longer Delays: The new release offerings you get on Netflix won’t be so new anymore. Warner Bros. had already kept its new release DVDs off Netflix’s site for 28 days. Now it’s extending that waiting period to 56 days.
Bottom line: Netflix certainly has enough going for it – outside of its earnings performance – to warrant the current share price boost. But it’s facing considerable headwinds as it continues its attempt to regain investor confidence and maintain strong subscriber growth.
So don’t expect the uptick to last long at this pace. Especially considering that one of its main competitors is planning to turn up the heat this year. More on this tomorrow.