Netflix Shareholders Rejoice: Q4 Brought Record Subscriptions

Source: Netflix

From Netflix’s (NASDAQ:NFLXfourth-quarter numbers, it seems subscribers are rushing to the company not only because the number of Internet-connected devices are increasing, but because they want to watch the company’s original programming. After a single season, Netflix-produced programs have garnered “over 80 major award nominations and wins, including Emmy and Golden Globe recognition of House of Cards, Orange is the New Black, Arrested Development and Hemlock Grove,” CEO Reed Hastings wrote in his fourth-quarter letter to shareholders.

Netflix’s rapid rate of subscriber growth continued into the fourth quarter of 2013, with 2.3 million new American households signing up for the streaming service, marking the company’s best quarterly performance in three years. Plus, Netflix was able to added another 1.7 million international subscribers, pushing its foreign customer base beyond 10 million for the first time in company history.

By the end of 2013, 44 million people had subscribed to the online streaming service. The larger-than-expected customer additions prompted investors — who bid shares up 312.15 percent last year — to advance the stock as much as 17.67 percent to $392.75 per share in extended trading after fourth-quarter results were released Wednesday.

Alongside fourth-quarter subscriber growth, revenue rose 24 percent, year over year, to $1.18 billion, while profit increased to $48.4 million, or 79 cents per share, an increase from the $7.9 million, or 13 cents per share, Netflix earned in the year-ago quarter.

Still, there are lingering concerns. “Obviously, they did better than Wall Street expected and added more subscribers than most people were expecting,” Frost & Sullivan principal analyst Dan Rayburn told USA Today. “When does Netflix really peak out in the U.S.? Most people thought it would be a year ago, but it’s still adding subscribers.”

For years, Netflix struggled. First it was Hastings’ 2011 decision to separately price the company’s DVD and streaming services, which caused shares to fall 80 percent; then, it was activist investor Carl Icahn’s pressure on executives of the Internet streaming service to sell the company, growing competition from Amazon (NASDAQ:AMZN), and difficulties negotiating affordable prices for content licensing.

But since the apex of the company’s problems — when its stock was dragging around $50 per share in the middle of 2012  – investors have bid shares of Netflix up more than 465 percent. And more importantly, Netflix has been reborn.

Netflix’s turnaround came about through the creation of original content, an idea that became more and more appealing to management as content acquisition costs rose. As early as last summer, the New York Times’ David Carr wrote that television has foreseen its future, and “Netflix is there.” It was his opinion that Netflix had employed technology and an expertise in viewer algorithms to completely “transform the box in your living room,” and by doing that, had transformed itself.

Comments made by Hastings in Netflix’s letter to shareholders in July reinforced that idea. With the new emphasis on original content, the company’s management was able to launch a transformation that will make it more than just a streaming site. The hope is that Netflix’s service will be competitive with companies like Time Warner’s (NYSE:TWX) HBO.

As Kevin Spacey — star of the Netflix-produced House of Cards – said during an August speech at the James MacTaggart Memorial Lecture at the Edinburgh Television Festival, original content has more than broadened the company’s reach: It has made Netflix’s service original and breathed new life into television.

“The obligation of a pilot — from the writing perspective — is that you have to spend about 45 minutes establishing all the characters, create arbitrary cliff-hangers and generally prove that what you are setting out to do will work,” Spacey said. “Netflix was the only network that said, ‘We believe in you. We’ve run our data and it tells us that our audience would watch this series. We don’t need you to do a pilot.’”

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