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Tickers in this Article: NFLX, GOOG, AMZN, YHOO, EBAY
Netflix (Nasdaq:NFLX) turned in a resounding earnings report with a surge in revenue, earnings and subscribers, which dramatically exceeded analyst expectations. The company also moved its first quarter revenue and profit forecasts higher as the movie rental and streaming video company continues its torrid growth pace.

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Twenty Million Subscribers
Netflix added 3.08 million new subscribers this quarter, bringing its total to 20.01 million. The company spent nearly 10% less in marketing in the quarter to gain the new subscribers. The company's robust pace in gaining subscribers is slated to continue, with Netflix expecting to have as many as 21.9 to 22.8 million by the end of the first quarter. The growth has largely been fed by the appeal of Netflix's streaming video.

Fourth Quarter Numbers
Revenue increased from $445 million in the previous year's fourth quarter to $596 in the fourth quarter of 2010. Net income was $47 million or 87 cents per diluted share, up from $30.9 million or 56 cents a share. Analyst estimates had the EPS coming in at 71 cents. For the full year, earnings per share was $2.96, a 49.5% increase.

Operating margins, which had dropped sequentially from 14.8% to 12.7% from the second to third quarter, rebounded to 13.1% in the fourth quarter. Netflix also had a strong resurgence in cash flow from operations. In the fourth quarter, cash flow from operations reached $96.7 million, closer to the $105.8 million generated in Q4 2009. Capital expenditures to secure content deals as well as timing or booking these has to do with these fluctuations. The variation on operating margins has to do with paying for growth.

Netflix Confounds The Critics
This quarter, Netflix clearly silenced its critics for the moment. In the long run, questions about the business model and its barriers to entry will be addressed in the real digital world. Potential challengers such as Google (Nasdaq:GOOG) and Amazon.com (Nasdaq:AMZN) among others, abound. Time and competition will eventually show whether Netflix can turn its competitive lead into a consistently dominant one, like what Google and Amazon now enjoy, or whether Netflix will be reined in more like Yahoo! (Nasdaq:YHOO) and eBay (Nasdaq:EBAY) have been by competition. So far, Netflix is running ahead of everyone.

The Challenges Ahead
Investors want to know if this growth will continue. There are concerns about the costs for Netflix continuing to grow its business. Its cap ex for content deals, not to mention costs incurred for subscriber growth, can certainly restrain free cash flow and earnings. But Netflix has met challenges so far. Its savvy deals with content providers show its skill in building its business. With its streaming content model, there are wide expansion possibilities that can grow revenue.

The Bottom Line
In the last year, the stock has rocketed from $61.03 to $217.98 in a steady march upward. Shares trade at a current P/E of more than 73. Even long-term growth investors realize you sometimes have to pay up for growth, but the stock has been bid up excessively. Any earnings bump or mild stock market event could send shares cascading. For now, fundamental investors would do well to leave it alone and wait for a substantially better buying price. (Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth. Check out Great Company Or Growing Industry?)

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