Netflix Delivers Jet Propelled Growth
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX) announced Q4 2012 financial results on Jan. 23. The company reported $8 million in net earnings or $.13 per share. Upon the news, the stock grew by 42% in one day with the release.
Netflix started to lose the confidence of its customers 18 months ago when they changed their domestic business model of allowing customers to get DVD rentals and streaming services in a single package. This was done to fund the company’s expansion in international markets. This proved to be fatal as Netflix lost the confidence of domestic customers. The losses incurred in the international expansion further brought down the profit leading to a fall in the company’s market standing.
The company did manage to improve the customer base slowly, but unexpected profit for the December quarter helped Netflix to regain the confidence of investors.
About the company
Founded in 2007, Netflix is an internet television network with presence in 40 countries around the world. The company deals in video streaming, online DVD & Blue -ray Disc rentals.
Let us look at the revenue figures for Q4 2012. The chart shows that the year-on-year revenue for the December quarter is increasing over the years, but costs are increasing heavily as well. This is a great concern for a company since the net income is going down.
In Q4 2012, the company made net earnings of just $8 million as compared to the $36 million for Q4 2011. Though the annual revenue has grown to $3.6 billion from $3.2 billion last year, the net annual income for 2012 has come down to $17 million from $226 last year. EPS for 2012 is $0.29.
Company projections and analyst expectations
Wall Street analysts projected revenue of $934 million for Q4 2012. Netflix had announced that it is expecting a loss for the December quarter. The company outperformed the expectations of analysts and even though the revenue growth declined, the company's stock rose 42% on the first day after announcement. Netflix said that net income exceeded the guidance due to out-performance in the domestic and international streaming segments.The loss in revenues was mainly due to the decline in DVD profit and increase in international expansion losses.
The company has projected an EPS of $0.23 on $1 billion in revenue for the first quarter of 2013. Analysts still expect a loss for Q1 2013.
Amazon is trying hard to expand and pose a serious threat to Netflix. It is trying to leverage its existing online customer base to promote Amazon Prime, by offering a variety of free services coupled with it. New deals like the ones with cable network Epix, may help Amazon to grow and acquire more titles, but Netflix has an upper hand as far as the costs are concerned.
HBO GO is much smaller than Netflix, but it is giving competition in international geographies, particularly northern Europe. With the extensive backing of the parent company and the spread of HBO throughout the globe, it can pose stiff competition for Netflix.
Netflix has seen unexpected stock growth, but can we really count on this company? Financial figures show that revenue growth is slowing down and the costs are increasing.
Netflix added 2 million domestic subscribers in Q4 and around 1.8 million international subscribers. The company is expanding internationally. A reduction in international losses is expected as the growth in customer base outweighs content costs. The company is also planning to roll out original content in new categories, a move that can help the company to increase its revenue further. However, decreasing DVD subscriptions and increasing competition pose serious challenges.
New deals and business models with well established market players may give Netflix a competitive advantage. Netflix recently made a deal with Disney to show the latest Disney movies on its network from 2016 onwards. Moves like this foster a stronger relationship with customers and add to the company's credibility.
Netflix's business model is to provide an alternative to cable television by removing the shortcomings like low quality, interruptions like ads and lack of quality content. There exists a small market of consumers who feel that an alternative to the traditional cable television should be promoted.
As the time passes, the popularity of internet television is increasing and it offers a tremendous opportunity to Netflix to expand and achieve economies of scale. Although, competition poses a serious threat to Netflix. Losses associated with expansion and changing product demands may further destabilize the company.
Netflix is at a critical stage, which can either give rise to a great corporation or destroy its very existence.
StockRiters.com has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!