Netflix, Inc. (NASDAQ:NFLX), which had dropped $7 per share on April 16 over skepticism it could beat its earnings estimates, instead blew through them and rose almost 7% in premarket trading April 17.
The streaming video company said it earned $290 million, 64 cents per share, on revenue of $3.7 billion for the quarter, adding 7.41 million new members, 5.46 million of them outside the U.S., for a total of nearly 125 million.
This came about despite a price hike that brought the cost of its most popular plan to $14 per month. It meant total revenue grew at an annual rate of 43%.
The numbers seemed set to lift the entire stock market when trade opened April 17. The market cap of Netflix is now nearly $150 billion, just a few billion short of the Walt Disney Co (NYSE:DIS) and $12 billion short of Comcast Corporation (NASDAQ:CMCSA).
Infrastructure Light
Netflix is now worth nearly as much as the dominant owners of networks and cable channels despite not having any infrastructure of its own. Instead, it rents cloud capacity from Amazon.com, Inc. (NASDAQ:AMZN), which is supposed to be its fiercest competitor, and uses open source technology to reach subscriber homes at minimal cost.
Just five years ago Netflix’ value was being compared with cable channels such as Discovery Communications Inc. (NASDAQ:DISCA). Three years ago its value was being compared with HBO, the jewel in the crown of Time Warner Inc. (NYSE:TWX). Now Netflix has nearly twice Time Warner’s market cap.
Despite Netflix’ success without infrastructure, its competitors are still playing the infrastructure game, with Comcast and Disney fighting over the entertainment assets of Twenty First Century Fox Inc. (NASDAQ:FOXA), which has a market cap of $68 billion, and Sky PLC (OTCMKTS:SKYAY), which has a market cap of about $30 billion.
Instead of putting capex into delivery, Netflix has been putting it into content. It has a 2018 content budget of $7 billion, and long-term debt of $6.5 billion, against total assets of $20.6 billion. By comparison Comcast has debt of $59 billion on assets of $186 billion.
Hollywood is now a capital asset.
The Secret Sauce
Netflix’ secret sauce remains its consumer software, which learns what viewers most like to watch and delivers it through recommendations.
This is similar to the software Facebook, Inc. (NASDAQ:FB) has been criticized for deploying, narrowing in on tastes and delivering the precise things people want. Some critics claim Netflix doesn’t offer a “balanced diet” of content, but it’s offering what users want, and all producers have jumped through the requisite business-and-regulatory hoops, eliminating the “fake news” problem.
As Netflix becomes a dominant form of entertainment, meanwhile, it is drawing more criticism from the movie industry it’s displacing. The network will not appear at the Cannes Film Festival this year, for instance, because it makes films available for home viewing at the same time they’re released in theaters. More recently director Steven Spielberg has suggested Netflix movies should not be considered for Oscars, calling then “TV movies.”
The Bottom Line
The bottom line is simple. The Netflix bulls are right, the bears are wrong.
Netflix still has a long runway of growth ahead of it. While 125 million is a big number, it’s a very small percentage of the total global market. Buying a Netflix subscription and an internet connection is much, much cheaper than any cable package, and that’s the economic calculation people are making.
Netflix’ real competitors aren’t even Comcast and Disney anymore. They’re Amazon and Alphabet Inc. (NASDAQ:GOOGL), which offer both streaming subscriptions and the infrastructure to deliver them.
Hey, they once laughed when Netflix was compared to Comcast and Disney.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
