Netflix (NFLX) shares are up some 25% in the days since reporting first quarter earnings, which is the kind of rise that usually requires a much more dramatic event. So what did investors see in this report that made them so excited about Netflix? Here’s some of it, in charts.
Revenues popped higher on the addition of about 2 million domestic and 1 million international streaming customers, bringing paid membership from both to about 36.24 million. That faster growth rate is important because Netflix’s content costs – mainly what it pays distributors for rights to all those movies and TV shows it streams – are growing too. The biggest, most welcome surprise in the results was that domestic membership revenue growth exceeded content costs by a wide margin.
Note the word “domestic.” Internationally, Netflix was still losing money in streaming, although it now believes that domestic success will serve as a playbook to improve its fortunes overseas. What would have been pretty spectacular profit margin growth was subdued by that overseas weakness.
It’s hard to overstate the importance of these new numbers to Netflix investors. Perhaps the biggest obstacle to a rising share price for this company would be high content costs that keep profitability small, even if its subscriptions remained wildly popular. Investors worry about Netflix’s ability to control its costs as competitors like Amazon.com. (AMZN), Walt Disney’s (DIS) Hulu.com and Apple’s (AAPL) iTunes bid up prices on the same movies and shows Netflix viewers want. Netflix did a very good job of that last quarter, as well as attracting new customers with both acquired content and in-house production.
Assuming Netflix can keep up the good work, investors will have a more basic question to mull when considering this company: just how much is a growth stock like this worth? Right now, Netflix shares trade at a forward PE ratio of 190. Using the YCharts Stock Screener, one can see that, of companies with market caps higher than $10 billion, only LinkedIn (LNKD) trades at a higher forward PE ratio.
Netflix shares still aren’t where they were before the company lost investor faith a couple of years ago, when it did a messy job of refocusing away from DVDs and onto streaming. But it looks like it’s regaining it at a very good clip now, as seen in a stock chart.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.
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