Netflix's stock closed Thursday up more than 42 percent, bolstered by a fourth quarter earnings report that shattered Wall Street's expectations.
Shares of Netflix were trading at $146.86 after the company reported that it had added 2 million streaming subscribers for its U.S. service and posted a profit of 13 cents a share during the three months ending in December. Analysts had projected the company would add 1.5 million new customers stateside and would show a net loss.
It has been a stunning day for the company, which less than 24 hours ago was trading at $103.26 when the closing bell rung. The market's bullishness on Netflix's balance sheet is also in stark contrast to its feelings last year at this time. At that point, the company was still reeling from its decision to hike prices and aborted effort to spin-off its DVD business into a separate company called Qwikster. Today, its shares have more than doubled from where they were four months ago.
Netflix CEO Reed Hastings pictured above left.
"Netflix is showing that they’ve got a lot of staying power," Daniel Ernst, an analyst with Hudson Square Research, told TheWrap. "They're very well managed, and they’ve done a phenomenal job of overcoming their self-inflicted wounds."
So has Netflix resurrected itself, rising phoenix-like from the ashes of the Qwikster debacle or is this is it too soon to discount fears that the company is another Internet-era Icarus?
Certainly, Ernst thinks that Netflix is on the rebound and he's maintaining a "buy" rating on the stock. So does activist investor Carl Icahn, who told Bloomberg Wednesday that he is keeping his 10 percent stake in the company, because he believes it won't stop climbing.
"We still own every share we bought and we believe it’s still got tremendous potential," Icahn told Bloomberg.
Tony Wible, an analyst with Janney Montgomery Scott who has been skeptical of Netflix's long-term strategy in the past, now sounds like a convert. He thinks that major content deals, like the one that Netflix signed with Disney last year to license films from Marvel and LucasFilm, have positioned the company to be the dominant player in the streaming market for the foreseeable future.
The company could look even more indomitable if audiences respond to the two new shows Netflix is unveiling exclusively this spring — the Kevin Spacey political thriller "House of Cards" and new seasons of the cult comedy "Arrested Development."
"The stock is relatively cheap compared to where I think it can ultimately go," Wible said. "They're slowing the decline on their DVD business, which is still a cash cow, and their streaming business is now growing at a faster pace."
Others are less certain that Netflix can sustain these gains. Analysts like Eric Wold of B. Riley & Co. believe that Netflix will still be weighed down by the escalating fees it has to pay to studios in order to access their content.
The sell-side crew maintains that Netflix benefited from Verizon and Redbox's failure to launch its own streaming service during the final months of 2012, which helped it greet the new year without having to deal with another deep-pocketed competitor trying to plant a flag in the space.
However, with Amazon and Hulu also in the market for programming, they believe that Netflix still has not explained how it will keep paying for the movies and shows it houses without jacking up the prices on its subscription plans again. As the exodus of members that greeted the company's last attempt to goose fees demonstrated, there is real danger should Netflix decide it can't afford to keep rates at their current levels.
"It's a great brand and it has a great head start over its competitors, but a lot of the content is ubiquitous on all of these streaming services," Wold said. "They're going to have to keep spending an increasing amount on content."
For now the company said it may take advantage of current interest rates to exploit debt markets to fund those costs or bring on other partners.
"If they raise outside capital to fund more content acquisitions, it's an admission that their current business outlook will not be enough to fund this content," Wold added.
Netflix's stellar quarterly earnings report is less about its business fundamentals than it is a triumph of managing expectations, claims Michael Pachter, an analyst with Wedbush Securities. He notes that the company revised its subscriber projections downward earlier this year, which allowed them to best those lowered estimates this week.
Pachter also complains that Netflix, battle-hardened by its stock swan-dive last year, has become much more withholding when it comes to releasing financial information. It has stopped reporting on the number of subscribers who had dropped its service, something known as its churn, and no longer reports its total domestic subscribers (those who opt for both streaming and DVD), which prevent analysts from determining how many of these members are streaming only, DVD only, and hybrid users..
This newfound guardedness isn't hurting the company's share price, though.
"They're successfully managing expectations by dropping relevant statistics every single time they report," Pachter said. "Every time they give less information, the Street only loves them more. They’re less transparent than they’ve ever been."
Pachter and Wold are still maintaining their "sell" ratings on the stock, but those investors who got in when Netflix's share price was deflated last year are looking pretty smart this week. Take Icahn. When he bought his shares and options in the company last fall, the stock was trading at less than $60. On Thursday, those same shares had climbed more than $80.
It was clear from the earnings call that Netflix is feeling more emboldened these days, even though Netflix CEO Reed Hastings was hesitant to say that the company had fully rehabilitated its image.
"We are extremely thoughtful and careful about what we’re trying to do because it wouldn’t take much to have the issues layer up again or for us to lose track," Hastings said. "So I’d say we’re now on probation at this point, so we’re out of jail. But this feels good."