Netflix Looks Good in Opposition to Comcast-Time Warner Cable

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Shares of Netflix (NASDAQ:NFLX) closed Monday’s regular session up an unassuming 0.8 percent at $348.49, but the stock jumped 7 .89 percent in pre-market trading after the video-streaming service posted strong first-quarter results. Revenue of $1.27 billion were up 24.5 percent on the year and in line with analyst expectations. Net income of $53 million, or 86 cents per share, was up from just $3 million in the year-ago period, or just 5 cents per share, and beat the mean analyst estimate of 83 cents per share.

Significantly, Netflix reported a contribution margin of 15.6 percent in the first-quarter, up from 12.2 percent in the fourth-quarter of 2013 and up from 7.0 percent on the year. This is the net of a 25.2 percent domestic streaming contribution margin and a -13.1 percent international streaming contribution margin. Domestic revenue of $799 in the first-quarter accounted for nearly 80 percent of total revenues, while profit of $201 million absorbed $35 million in losses from the company’s international streaming segment.

Perhaps even more importantly, Netflix reported that total member growth remained strong in the first quarter. The service added 4 million subscribers (2.25 million domestic, 1.75 million international) and ended the quarter with 48.35 million (46.14 million paid), up 31.2 percent on the year. However, net subscriber growth is expected to decline fairly dramatically in the second-quarter to just 1.46 million, reflecting expected growth of 520,000 domestically and 940,000 internationally. Netflix cited the success of House of Cards as one of the primary factors behind the growth.

“We are approaching 50 million global members, but that is far short of HBO’s 130 million,” wrote Netflix CEO Reed Hastings and CFO David Wells in the company’s first-quarter letter to shareholders. “We are eager to close the gap.”

But where subscriber growth forecasts may be wanting, future earnings forecast are stronger-than-anticipated. Netflix is projecting net income of $69 million in the second-quarter, or $1.12 per share, above the current mean analyst estimate of $1.00 per share. Moreover, total contribution margin is expected to increase to 18.5 percent, with the international margin narrowing to just -3.9 percent, an expected loss of just 12 million.

But despite the optimistic report, Netflix still faces serious headwinds. Outside of Monday’s earnings report, shares are down nearly 5 percent this year to date. Citing concerns over the net neutrality issue and possible shock over a price increase — which Netflix announced alongside earnings — Wedbush Securities analyst Michael Pachter recently wrote a note maintaining an Underperform rating with a price target of $175. Hastings announced that there would be an increase of “a dollar or two,” depending on the market, for subscribers.

Also in his letter to shareholders, Hastings came out against the proposed merger between Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). Hastings wrote that, “The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger.”

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