--Shares book sharpest-ever intraday gain
--Company predicts brisk 1Q subscriber growth
--Large number of investors had bet against stock
(Updates with closing price in paragraph three.)
By Drew FitzGerald
Netflix Inc. (NFLX) shares booked their sharpest-ever one-day
jump Thursday and hit their highest level since 2011 after a
surprise quarterly profit by the online video service 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 about 1.52 million subscribers short of its original
goal of gaining seven million U.S. customers in 2012, but its
unexpected 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 rose 42% Thursday at $146.86. The stock, which hit a
16-month high during the day at $149.17, has nearly tripled since
August.
Adding to the gains, some shareholders likely unwound bets that
profit when Netflix's stock falls, known as short interest. The
number of Netflix shares sold short nearly doubled between March
and October as those investors expected continued pressure on the
stock while the company spent hundreds of millions of dollars to
add more content and expand overseas.
The company's short interest already had retreated since
October, but it still represented about 24% of the shares
outstanding at year's end, according to data from FactSet
Research.
On the other side, billionaire investor Carl Icahn was certainly
among the day's biggest winners. Mr. Icahn reported a 10% stake in
the company in November, buying about 5.5 million shares at around
$58 a share. At the time, Mr. Icahn suggested Netflix might offer
an attractive acquisition target to better-capitalized companies.
Now, the investor is sitting on a nearly $500 million gain.
The recent increase in Netflix's share price makes the takeover
option more difficult. Overnight, the company added nearly $2.4
billion to its market value, which now totals about $8.16 billion.
Netflix remains richly valued, though, priced at 135 times future
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 Wednesday. "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 expansion 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.
Executives predicted the number of domestic subsribers could
reach between 28.5 million and 29.2 million by the end of this
quarter, implying new customers could join as quickly this quarter
as they did during the holidays.
"Netflix is a primary beneficiary of the shift toward mobile
devices," J.P. Morgan analyst Doug Anmuth wrote in upgrading
Netflix's stock to overweight. "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."
Making Netflix a compelling option for consumers still hurts the
company's bottom-line. Its cost of revenue, which reflects
licensing fees paid to content owners, surged 21% in the recent
quarter.
Netflix also has invested heavily in its own content over the
past year, planning three original programs, including a reboot of
the critically praised "Arrested Development" series. Those
projects added to Netflix's expenses, even as the company continued
pursuing third-party titles. Its latest three-year agreement
provided access to 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 that 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
Subscribe to WSJ: http://online.wsj.com?mod=djnwires