After Strong Earnings, Netflix Sets the Stage for Long-Term Growth
If your New Year’s gift to yourself was a long position in Netflix (NASDAQ:NFLX), congratulations! Your investment has grown by nearly 60 percent in under a month, and the company’s fourth-quarter results embarrassed anyone with a claim to the 24 percent of the stock’s float that was short as of December 31. The stock is up over 63 percent over the past five days, and is trading around $166 per share, compared to about $100 before earnings.
Divisiveness between Netflix bulls and bears was incredibly high ahead of earnings. This is reflected not just in the large amount of short positions, but an enormously wide range of price targets held by analysts. A mean target of $109.22 is a product of highs of $190, which doesn’t seem that absurd right now, and lows of $45, which didn’t seem that absurd in August or October, when the stock was trading around $55.
At issue were subscribers and content fees. Bears were concerned that Netflix’s subscriber growth would slow in the quarter, compounding issues created by more expensive licensing agreements with Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX). But the company smashed expectations, adding 2.05 million domestic subscribers during the quarter, and at the same time increasing its contribution margin 2.1 points to 18.5 percent, a healthy and sustainable level.
The stock climbed an additional 13 percent on Friday morning in heavy trading, which may be indicative of a short squeeze. In any case, it’s clear the bulls win this round. Netflix’s strong fourth-quarter results have laid a foundation for the company to pursue compelling long-term strategies…
International expansion of its streaming video service is an obvious next step for the company, and Netflix is in no rush to pursue. It knows it’s at the top of the market, and has opted to move carefully instead of aggressively. The company added 1.81 million net international subscriptions last quarter, but still lost money.
The company has not planned any launches into new markets for the first half of 2013, but pointed at the second-half of the year and 2014 for possible expansion. By that time, Netflix should turn the loss-making division into a profit-making machine with margins similar to its domestic segment.
But the obvious angle is, as usual, not nearly as interesting as an innovative strategy. Enter DIAL, a collaboration between Netflix and YouTube, which is owned by Google (NASDAQ:GOOG). DIAL is a protocol aimed at helping second-screen app developers discover and launch their products to smart TVs and connected devices. The initiative has gained support from major players such as Hulu, Samsung (SSNLF.PK), Sony (NYSE:SNE), and BBC.
DIAL will toe the line with Apple’s (NASDAQ:AAPL) AirPlay, but this shouldn’t be a huge concern. Apple will develop a strong, competent product that takes care of the Apple ecosystem. For apparently everything else, given who has signed on already, there’s DIAL.
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