While Netflix, Inc. (NASDAQ:NFLX) pulled off another impressive quarter, the performance was not enough to pop Netflix stock. But this should not be too much of a surprise. The fact is that NFLX has already posted robust gains for the year, up about 62% to $200.46. The market cap is also now at $86 billion.
But the NFLX earnings report does highlight that the growth story is very much intact. During the quarter, revenues jumped by 30% to $2.99 billion and the net income came to $130 million, or 29 cents per share, up from $52 million, or 12 cents a share for the same period a year ago.
The NFLX earnings report also provided for strong guidance. For the fourth quarter, the company expects revenues of $3.27 billion and earnings of 41 cents a share. By comparison, the Street was looking for revenues of $3.15 billion and NFLX earnings of 33 cents a share.
The main driving force, of course, is the continued traction with the membership base. For Q4, it increased by 5.3 million, compared to the analysts’ estimate of only 4.5 million. As for the current quarter, NFLX projects that the user base will rise by 6.3 million.
All this is a validation of the ambitious content strategy. During the past five years, NFLX has invested aggressively in original shows like House of Cards, Orange is the New Black and Narcos. There has also been many local content offerings that have been critical in boosting foreign membership growth.
Yet the NFLX content strategy is going to get an even bigger boost. According to the NFLX earnings report, the company plans to boost spending to $7 billion to $8 billion, up from $6 billion for 2017. This will involve developing a spate of new shows as well as 80 original films.
Although, NFLX indicated that it would not likely be a bidder of the beleaguered Weinstein Company. But then again, it would not be surprising to see the company make strategic acquisitions. Note that NFLX recently purchased Millarworld, which is a comic book operator.
The Challenges and the NFLX Earnings Report
Despite all the good news with the NFLX earnings report, the company still faces considerable risks. For example, the content strategy is far from guaranteed as the entertainment industry is streaky. That is, if NFLX goes into a slump, it would certainly weigh on the company’s shares.
Another issue is that the traditional media industry is ramping efforts with streaming. Keep in mind that Walt Disney Co (NYSE:DIS) plans to launch two services during the next couple years. Oh, and the company says it will pull its content from the NFLX platform.
But of course, consumers already have many other options such as Amazon.com, Inc. (NASDAQ:AMZN), Hulu, Alphabet Inc’s (NASDAQ:GOOGL) YouTube and CBS Corporation (NYSE:CBS).
And finally, NFLX is taking on substantial debt to finance the content strategy. Currently the long-term debt is nearly $22 billion, which compares to about $17 billion a year ago.
Bottom Line On Netflix Stock
The streaming market is likely to see long-term growth, as consumers want more choices at affordable prices. According to Ovum, the global spending is forecasted to go from $32 billion in 2016 to $60 billion by 2022.
And yes, the leader of this megatrend is NFLX. The company has become the top-of-mind brand in the industry and has a significant lead in terms of market share.
Granted, Netflix stock is far from cheap right now, with the forward price-to-earnings multiple at 94X. But then again, a premium is deserved for the company’s dominant position. And more importantly, it’s a good bet that the growth story is far from over.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
