Netflix shares surge 37% on news of unexpected profit

Netflix shares are now the highest they've been in a year

Netflix shares have ballooned 37.9% Thursday morning to $142 after the company revealed a strong fourth quarter.

While investors and analysts were expecting the worst, Netflix shocked many with a surprise profit in its Q4 2012 earnings report. Shares surged ahead 35% in after-hours trading to $139.

Wall Street consensus was that Netflix would post an EPS loss of $0.12 due to the cost of acquiring content, but Netflix came through with the exact opposite: an EPS of $0.13 in profit. Revenue was also higher than expected at $945 million, compared to analysts’ expectations of $935 million.

The company’s stock has been all over the place lately. Shares were buoyed for a while by the October announcement that Carl Icahn had purchased 10% of Netflix’s stock. That looked to many like a sign that Netflix was going to sell on Icahn’s urging, so Netflix consequently created a “shareholder rights agreement”—also known as a Poison Pill to prevent Icahn from getting too aggressive.

Later, Netflix’s stock got a big boost in December when it acquired exclusive pay TV rights to Disney movies. The bad news: it doesn’t take effect until 2016.

“Add 6 to 9 months for this content to reach Pay TV Window and it will be late 2016/early 2017 before much of this new Disney content will be available on the Netflix platform. At that point, this content will likely help drive subscriber growth. The problem is that event is almost four years away,” wrote Sterne Agee analyst Arvind Bhatia in a research note.

But Netflix surprised in other ways as well. The company added two million domestic members and 1.8 million international members.

“Our holiday season was particularly strong, driven by consumers buying new electronic devices, including tablets and smart TVs,” the company wrote in its letter to shareholders.

Netflix now has 27 million domestic members and estimates in its guidance that that number will grow to 28.5-29.2 million by the end of Q1 2013.

Interestingly, Netflix addressed the reality that all of the Internet TV services (Amazon, Hulu, etc.) are beginning to look more and more alike. Netflix noted that of the 200 most popular movie and TV titles in its catalog, 113 were not on Amazon Prime, Hulu Plus, or Redbox Instant. Of the 87 that are on one of the other services, there is significant overlap between Amazon, Hulu, and Redbox.

“In other words, when it comes to the most popular content with members on Netflix, none of these services are good substitutes to Netflix,” the company wrote. 

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