Netflix (Nasdaq:NFLX) released its fourth quarter earnings results Jan. 23 after the close of trading. They were so good that the stock jumped a whopping 42% in the next day's trading. Netflix hasn't been this high since September 2011. On the news, a slew of analysts upgraded its stock with price targets upwards of $200. The good times appear to be back. Is it still a buy after the big move?

SEE: Analyzing Show Biz Stocks

More Subscribers
Netflix added more domestic streaming subscribers in the fourth quarter (2.05 million) than it has in quite some time. Its domestic streaming generated $589 million in revenue in the fourth quarter, a contribution profit of $109 million, and a contribution margin of 18.5%, 210 basis points (BPS) higher than in the third quarter. Internationally, its streaming business added 1.81 million subscribers, its highest addition in the past five quarters. All told, its streaming business now has 33.28 million subscribers worldwide. It's going to take a while, but I don't see any reason why Netflix can't get to more than 25 million subscribers outside the United States. Once it does, its profitability will substantially improve. Interestingly, Netflix suggested the first quarter would see contribution profits for domestic streaming exceed those of its DVD division for the first time in its history. It's a watershed moment for sure.

SEE: What's Next For Netflix?

Carl Icahn
Say what you will about the billionaire, but his call on Netflix was right on the money. Icahn accumulated his 10% stake in Netflix last October using a call option strategy that ultimately cost him an average of $58.41 per share. At the time of his filing, Forbes quotes Icahn as saying, "Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the Internet, mobile and traditional industry." In a nutshell, Icahn thought the shares were extremely cheap, especially to a larger company that could utilize its significant revenue generation to buy more content. Icahn says he's going to hang on to his shares, suggesting the company has "tremendous potential." With the shares jumping another 17% or so on Jan. 25, Icahn went into the weekend sitting on a paper profit of $626 million, which is an annualized return of 194%. He might say he's going to hold, but those kinds of profits are tough to resist.

SEE: The Greatest Investors: Carl Icahn

Netflix detractors argue that with content acquisition costs getting higher all the time due to increased competition, there's no possible way for its business model to successfully transition to a profitable one. On the surface, I can appreciate this argument given costs appear to be rising faster than revenue. They are building a content library, however, that will have a little of everything: original TV series, first-run movies from Disney (NYSE:DIS) and others, and everything else in between. The more subscribers it gets, the bigger the budget it has for getting unique, exclusive content. That's one of the reasons Icahn bought in; he could see that no other competitor, Amazon (Nasdaq:AMZN) included, has anywhere near the leverage Netflix has. Eventually, the variety and quality of programming will neuter its competition.

SEE: Netflix Has A Crowded, Bumpy Road Ahead

Although its domestic DVD business experienced a loss of 380,000 customers in the quarter, it was much less than expected. With 8.2 million DVD subscribers, this business appears to be an annuity, one that will ultimately disappear but not before it's paid out significant profits. It lost customers in the fourth quarter, yet its contribution margin was 50.1%, 190 BPS higher than in the previous quarter. So, even though its revenues were $17 million less, its contribution profit was just $3 million lower. And as I said previously, it's expecting to generate contribution profits from its domestic streaming in the first quarter that are higher than the DVD business. The DVD might be dying on the vine, but by hanging in there a little while longer, it's giving the streaming business the time it needs to become the profitable business model Reed Hastings knows it can be. This modern version of the horse and buggy will turn out to be its savior.

The Bottom Line
Given the unpredictability of the content business, Netflix is going to have further bumps in the road. There's no way around that. Its ability, however, to generate content people want to watch, whether it's brand new or 50 years old, is what sets it apart from its competitors. I personally love the fact I can explore documentaries such as the "Inside Job," old episodes of "Breaking Bad" and the "The Rockford Files," new shows such as "House of Cards" and still be able to watch John Candy for the umpteenth time in "Uncle Buck," all in one spot, commercial-free, at one really low price.

Netflix has got game - more than anyone knew.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  9. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  10. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!