Shares of Netflix (NFLX) are up nearly 17% in pre-market trading. The company's Q4 earnings proved it's still growing quickly. Netflix added more new subscribers in the U.S. (2.3 million) and internationally (1.7 million) than analysts expected last quarter.. And Netflix says it expects to add another 2.3 million U.S. subscribers and 1.6 million international customers in the first quarter, also ahead of analyst estimates.
Netflix has also demonstrated the power of its business model – the amount spent on content doesn’t go up as fast as revenue from new subscribers, leading to increasing profitability. For example, on the U.S. service, Netflix spent about 76% of revenue to provide service, down from 81% a year ago. Overall, revenue increased 24% to $1.18 billion but net income grew six times (!) to $48 million from $8 million. The 79 cent per share profit was ahead of analyst estimates of 66 cents.
If the stock had stayed at the closing price before its Q4 earnings results were reported, the P/E would have dropped from 280 to 180.
Wall Street has been clamoring for Netflix to raise prices, figuring so many people were already hooked on the service that they’d be willing to pay more. It ended 2013 with 33.4 million U.S. subscribers and 10.9 million internationally. But Hastings and his crew don’t want to sacrifice future growth – and they remember the damage over the attempt to raise prices in 2011 and split the company in two.
On Wednesday, Hastings first promised that all current subscribers would be “generously” grandfathered if there were any increase. But beyond that, he sounded like Netflix was more likely to add a new cheaper, entry-level price than raise prices.
Netflix has been experimenting with offering new customers a variety of pricing points above and below its current $8/month mainstay. There’s also a rarely used $12 family plan that allows four people to watch different shows at the same time. Hastings said they want to end up with three price points (good/better/best).
“We’re testing lots of things, some of which have been reported and some of which have not,” he said on Wednesday. “It’s not clear that one price fits all,” he said, adding that no “definite plan” had been decided upon.
A federal appeals court last week threw out rules that prohibited big Internet service providers from discriminating against websites or online services. Without the rules, companies like Verizon (VZ) (which brought the legal challenge) or Charter Cable (CHTR) might seek to squeeze companies like Netflix for more fees. The provider could threaten to slow down Netflix video streams to customers unless Netflix made additional payments.
Hastings took pains to combat those fears. He noted that it wouldn’t be in the Internet service providers’ interests to slow down Netflix. Instead, Netflix is a great selling point for Internet service, he said. He also thought Internet discrimination would cause so much consumer outrage that regulators or Congress would move to stop it.
He also dismissed fears that Netflix would need to increase its already substantial Internet traffic to start sending programs in the new ultra-high definition format known as 4K. Pointing out that few of its customers currently have 4K capable TV sets, Hastings said “there’s no tidal wave coming in the next 18 months.”
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