Netflix Becomes HBO; Target for Apple?

The latest quarter continued to see Netflix (NASDAQ:NFLX) on the rebound as the stock recovered from its large drop more than a year ago when the company was forced by market sentiment to retract plans to increase subscription charges. The stock had also seen significant devaluation when the company failed to add subscribers at a fast enough pace and invested heavily in both domestic and international expansion. Though the stock may not have reached its earlier glory days, for now, it has recovered and analysts expect it to continue to do so.

Netflix’s Financials
Netflix’s Q1 revenues grew 18% over the year to $1.02 billion, marginally ahead of market’s expectations. EPS of $0.31 was significantly ahead of the Street’s targeted earnings of $0.18.

The market was pleasantly surprised by strong growth in the subscriber base. Netflix ended the quarter with a paid streaming subscriber base of 34.2 million, reporting 40.2% growth over the year. The total streaming subscriber base grew 37% to 36.3 million. 

Netflix ended the quarter with 29.2 million subscribers in the U.S., a number that is a significant milestone for them. With their subscriber base, Netflix surpassed HBO’s 28.7 million domestic viewers and is now being called the most watched “cable network” in the country. It is an important breakthrough given that both Netflix and HBO began their stories by offering first movies then diversifying into original programming. HBO has also expanded their digital solutions by offering their content over the Internet through HBO Go.

Internationally, Netflix is growing as well. International revenues grew 230% over the year to $142 million. Domestic streaming revenues grew 26% to $639 million. In line with Netflix’s digital strategy, their domestic DVD business is dwindling. Revenues from the DVD segment fell 24% over the year to $243 million, with the number of subscribers dropping from 10.1 million a year ago to 7.9 million.

For the current quarter, Netflix expects streaming revenues of $821 million-$843 million, with a domestic subscriber base of 29.4 million-30.5 million and international subscribers of 7.3 million-7.9 million. They expect to end the quarter with an EPS of $0.23-$0.48, compared with the market’s estimates of $0.27 for the quarter.

Netflix’s Content Acquisition
Netflix’s success in the recent quarters is attributed to the improvement in their content. Not only did they tie up with multiple studios, but Netflix also began making their own content – a strategy that seems to be working. Their original series, “House of Cards,” has received positive reviews. Continuing on this path of “backward integration,” they recently released another original series, “Hemlock Grove,” to favorable reviews as well. The success of these series is attributed to the trove of information that Netflix has about their subscribers’ viewing choices and demographics, which helps them produce highly targeted content.

Streaming Plan Change
Soon Netflix will also release a new subscription plan for U.S. subscribers. Known as a four-stream plan, the offer will help earn extra revenues from the current freeloaders on their subscription system. Netflix lets customers view content on any number of devices with a single subscription and also permits two simultaneous streaming sessions from a single paid subscriber. Analysts estimate that because of these permissions, Netflix has nearly 10 million viewers watching their content through password sharing. Netflix plans to earn some revenue from these customers by launching a new plan at $11.99 that will permit four simultaneous streams. They expect less than 1% of their existing subscriber base to sign up for this plan.

Netflix’s stock is trading at $216.99, with a market capitalization of $12.15 billion. It touched a 52-week high of $219.38 earlier this week.

Netflix’s resurgence has also led to talks that the company may now be bought over by other tech giants. Some believe that Netflix may be a good match with Apple. Apple already has more than 400 million active iTunes users generating $3.68 billion in annual revenues from content sold through iTunes. The addition of Netflix’s content to their portfolio will offer these subscribers access to Netflix’s content. The deal would also help build investor confidence in Apple, which has been waning in view of a recent feeling of absence of innovation from the company since the demise of their visionary founder, Steve Jobs. At a $12 billion valuation, the price is small for the $145 billion cash pile that Apple is sitting on.