By Drew FitzGerald
Netflix Inc. (NFLX) shares rose as much as 44% Thursday, hitting
their highest level since 2011, after the online video service's
surprise quarterly profit renewed investors' faith in the company's
aggressive expansion plans.
Shareholders appeared caught off guard as the Los Gatos, Calif.,
company reported a better-than-expected addition of 2.05 million
new domestic subscribers to its video streaming service. Netflix
still fell short of reaching its original goal of gaining 7 million
U.S. customers in 2012, missing it by 1.52 million, but its
surprising profit of $8 million in the fourth quarter proved the
company can still make money even as it spends heavily to acquire
new content.
Shares traded 43% higher at $147.23 early Thursday, hitting a
16-month high. The stock has nearly tripled since August.
Billionaire investor Carl Icahn was certainly a big winner among
Netflix investors after he reported a 10% stake in the company in
November, buying shares at around $58 a share. Mr. Icahn at that
time suggested Netflix might offer an attractive acquisition target
to more well-capitalized companies.
Netflix's share price Thursday made that takeover option more
difficult after its sudden surge added nearly $2.5 billion to the
company's market value literally overnight, now totaling $7.8
billion. Netflix remains richly valued, with a price-to-earnings
ratio 185 times its expected earnings.
Chief Executive Reed Hastings tied the company's
better-than-expected growth directly to its spending on new films
and TV shows, describing a "virtuous cycle" of expanding content
attracting new subscribers, which in turn allows the company to
keep growing its library.
"What propels our growth is that continuing content," Mr.
Hastings said during the company's Wednesday conference call. "We'd
like to get more movies, we'd like to get more prior-season
television, we'd like to have more originals."
The company attributed much of its end-of-year growth to holiday
consumers snapping up tablet computers and smart TVs, both of which
make it easy to sign onto Netflix's $8 per-month streaming
service.
"Netflix is a primary beneficiary of the shift toward mobile
devices," J.P. Morgan analyst Doug Anmuth wrote in a note to
clients as the investment bank upgraded Netflix's stock to
overweight, a bullish rating. "We believe the proliferation of
tablets--especially low end devices with greater portability and
more attractive price points--has led to incremental viewing for
Netflix subscribers and improved the overall accessibility of the
service."
Netflix has invested heavily in new content over the past year,
planning three original programs including a reboot of the
critically praised "Arrested Development" series. The company in
December signed a three-year licensing agreement for Walt Disney
Co. (DIS) movies worth an estimated $300 million a year, according
to The Wall Street Journal.
The deal proved Netflix's intent to compete seriously against
pay-TV channels like Time Warner Inc.'s (TWX) HBO and Starz (STRZA,
STRZB).
Online rivals such as Amazon.com Inc. (AMZN) have quickly added
more content of their own, a concern that caused many analysts to
warn Netflix's dominant status in media streaming would soon give
way to a more competitive--and less profitable--environment.
Netflix sought to disprove that idea by comparing its 200 most
popular TV and film titles last quarter with content on Amazon
Prime, Coinstar Inc.'s (CSTR) Redbox Instant and Hulu, reporting
113 titles only Netflix could offer.
"Today in the United States, Amazon Prime's content has started
to be mostly a subset of ours and is," Mr. Hastings said Wednesday.
"I think over time there's a pretty good likelihood that we'll
compete like we compete with HBO. That is, we'll all have different
shows and all be competing for dollars and attention, but not have
the same content."
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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