Netflix, Inc. (NASDAQ:NFLX)’s recent quarter was more or less hailed as a resounding success as the company was able to grow its total subscriber base to 36 million. Not to mention that the international division was able to break-even for the first time. Shareholders of Netflix were cheerful of the earnings, with the stock rallying 24%
Netflix, Inc. (NASDAQ:NFLX)’s recent quarterly earnings report has launched the company into stardom. It also helps that Carl Icahn invested billions of his own dollars into the company. Now, to be honest, I had no clue as to who Carl Icahn was until the Netflix and Herbalife issues came to the forefront in the Wall Street Journal. But, that’s really beside the point.
Netflix’s stock price has grown staggeringly due to the deals it was able to make with Warner Bros. and The Walt Disney Company (NYSE:DIS). Time Warner Inc (NYSE:TWX) is an entertainment juggernaut, but it didn’t just end at Warner Bros. Netflix, Inc. (NASDAQ:NFLX) was able to score a deal with Walt Disney; this was the show-stopper that caused the stock to rally from $60 to $80. From $80 to $100 was the anticipation of the fourth-quarter earnings. With the fourth-quarter earnings a success, Netflix stock advanced from $100 to $180 per share. The success in the first quarter caused the stock to jump from $160 to $220 per share.
Netflix, Inc. (NASDAQ:NFLX) has been able to improve its contribution margin to 20.6% from 19.2%. The improvement in the contribution margin, along with subscriber additions of 2.03 million, caused the stock to surge. Doing some basic math, 2 million additional subscribers is like earning an additional $192 million in revenue per year. A single subscriber generates $8/month, or $96/per year.
The international division was able to grow its annual revenue by $96 million for the whole year, based on the net additions of a million subscribers. By the end of the next quarter, subscriber additions are expected to increase an additional million within the United States, with the international streaming expected to grow subscribers by 800,000. The growth was exponential, which is why investors are bidding the value of the stock higher.
Changing technology landscape may support Netflix
Google Inc (NASDAQ:GOOG) has been rolling out the development of its fiber network with blazing internet 1gb/s speeds (100 times faster than today’s broadband). The fiber network will generally lead to faster download times, which should improve the demand for streaming services like Netflix, Inc. (NASDAQ:NFLX). However, Netflix may have to respond to faster network speeds with higher quality movie files.
How much higher quality (perhaps 4080p), maybe 3D movies streamed to the desktop? Who knows? But I can smell rising capital expenditure costs for Netflix from a mile away. Verizon’s FiOS network was able to grow its revenue 16% year-over-year. Google Inc (NASDAQ:GOOG), encouraged by Verizon’s results may hasten its roll-out of fiber optic cable. Google Inc (NASDAQ:GOOG)’s near bottomless bank account will certainly change the internet landscape.
In a previous article I wrote; I assumed that if Google Inc (NASDAQ:GOOG) was able to capture 10% of the United States market for broadband services, it would contribute approximately $12 billion a year in revenue to the search engine giant. That being the case, analysts at Google Inc (NASDAQ:GOOG)’s recent earnings announcement asked, why Google Inc (NASDAQ:GOOG) was pursuing lower margin businesses outside of search.
Larry Page shrugged it off by stating that there aren’t that many businesses that are larger than search, therefore, investing capital into businesses outside of search that correspond with its overall business strategy was one of the ways it would sustain its incremental revenue growth.