Netflix Soars To All Time High After Hours On Small Beat; Unfazed By Net Neutrality

Tyler Durden's picture

NFLX is soaring after hours to fresh all time highs, not so much due to some blockbuster numbers, but because the company reported results that beat Wall Street's lowballed estimates once again. These were as follows:

  • Revenue of $1.175 billion
  • EPS of $0.79, or $48.4 million, beating expectations of $0.66
  • Domestic net adds were 2.33 million, Estimate 2.05 million, leaving a total of 33.4 million subs at the end of the quarter, and 31.7 million paid subs.

In terms of the company's business model, the things are as they were: NFLX is using the cash generated from its doomed, runoff legacy DVD rental business, which in Q4 generated $110MM of the total profit, or half of total, and is using that to fund its international expansion. So far, NFLX has 10.9 million total international streaming subs, which resulted in losses of $57.2 million. It remains unclear what the breakeven on this international growth strategy is in terms of subs, although NFLX has so far burned $663 million on foreign expansion in the past two years, offset by $991 million in profits at its domestic streaming operations. Does this justify a 300x P/E? For now the market's answer is a resounding yes, having sent the stock higher by $55 in the after hours, up 17%!


The company's forecast is below: the bottom line is that NFLX anticipates 1.6 million net adds in Q1 2014 higher than the 1.275 consensus, and expects EPS of $0.78 compared to the estimated $0.75.

However, EPS for this company, which has massive company content acquisition costs, are largely meaningless.

Additionally, since everyone is wondering just what pricing power NFLX has, here is how the company plans to once again reintroduce plan tiering - it bears remining what a horrible idea this was the last time around.

Last April we introduced a 4-concurrent stream $11.99 option to begin our evaluation of plan tiering. Since late last year, we have also been testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points. Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone’s taste.


If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices, so there would be no material near-term revenue increase from moving to this potential broader set of options. We are in no rush to implement such new member plans and are still researching the best way to proceed.


In Ireland, on January 10th, we increased our monthly subscription price for new members by one Euro from €6.99 to €7.99, bringing Ireland pricing in line with our other Euro-zone countries. Existing members in Ireland received two-year grandfathering of their existing €6.99 pricing. Because of this grandfathering, there will be no material revenue impact from this change in 2014. It’s too early to tell if this change will materially affect our growth in Ireland.

Netflix also admitted the competition is growing fast:

We think YouTube, Amazon Instant Video, iTunes video and BBC iPlayer are also growing fast. In the traditional MVPD sector, there is lots of activity that may affect us on the margin. Verizon is buying the Intel Internet MVPD system and recently bought a CDN (EdgeCast) and streaming software firm (UpLynk). These are big  investments, so they clearly have big plans. Sony announced they are launching an Internet MVPD system this year. Finally, depending on the decision of the Supreme Court, Aereo will either have to pay for the broadcast content like MVPDs, or the MVPDs will no longer be obliged to pay. Within the MVPD ecosystem, there are potentially big shake ups. In contrast, we continue licensing and producing more exclusive content for our direct-to-consumer business, and are relatively unaffected by the big bundle questions.

As for the one biggest item that everyone is, or should be, concerned about, the recent passage of Net Neutrality, NFLX was surprisingly non-challant, and its only argument against the potential collapse in profits once ISP start putting up gates, is that there is "broad public support" for cheap content, and "ISPs will "avoid this consumer-unfriendly path of discrimination." Good luck with that - the reality is that ISPs can't wait to start charging NFLX now that they have a legal backstop.

On Net Neutrality:


Unfortunately, Verizon successfully challenged the U.S. net neutrality rules. In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.


The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination. ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize government action.


Moreover, ISPs have very profitable broadband businesses they want to expand. Consumers purchase higher bandwidth packages mostly for one reason: high-quality streaming video. ISPs appear to recognize this and many of them are working closely with us and other streaming video services to enable the ISPs subscribers to more consistently get the high-quality streaming video consumers desire. In the long-term, we think Netflix and consumers are best served by strong network neutrality across all networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct, less regulation is warranted. To the degree that some aggressive ISPs start impeding specific data flows, more regulation would clearly be needed.

Finally, curious how much cash a company that tomorrow will likely have a $23 bilion market cap, generates, here is the answer: $5.2 million in the quarter, and 16.3 million for all of 2013.... negative, that is.

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Vampyroteuthis infernalis's picture

And to think I was going to short this shit! What a joke!

max2205's picture

Tried to watch anything the other was all I'd seen or crap.....the video quality sucked as well

James_Cole's picture

NFLX, thorn in my side. 

jbvtme's picture is all trash.  check out nature docs otherwise i'm long drool buckets....

dark pools of soros's picture

hey go feed your pidgeons again...

Cult_of_Reason's picture

NFLX earnings have a Madoff-like/Enron-like doctored reverse engineering feel to it -- neatly beating analyst estimates in each category by a little bit + by rounding numbers. ESP beat was by the percentage required to justify marking up the stock to old highs.

Also, the market makers who marked up the stock during AH ignored NFLX $7.3 billion off balance sheet liabilities (that jumped by $900 million last quarter). NFLX also announced a plan to issue $400 million of new debt.

James_Cole's picture

Also, the market makers who marked up the stock during AH ignored NFLX $7.3 billion off balance sheet liabilities (that jumped by $900 million last quarter). NFLX also announced a plan to issue $400 million of new debt.

Yeah but nobody gives a shit about that..

Cult_of_Reason's picture

Not everyone does not give a shit.

Most likely they will open NFLX around $390, but as soon as it opens, the shares and calls will be sold aggressively.

Heavy selling of calls (profit taking) will force the market makers to short the stock to hedge their books. NFLX short interest is at a record low level, not many shorts there to buy the stock at these inflated levels.

James_Cole's picture

Heavy selling of calls (profit taking) will force the market makers to short the stock to hedge their books. NFLX short interest is at a record low level, not many shorts there to buy the stock at these inflated levels.

People been saying that for a while, NFLX has SHIT financials, but so does amzn... beartrap. 

Freddie's picture

The majority of options buyers on NFLX are most likely using weekly options.  Those expire on Friday and the decay hits hard at the end of tomorrow.  Go look at the puts and calls this week on NFLX.  The put volume and open interest or contracts is very low on the put side while the calls are about 10x greater than the puts. 

Supply and demand.  Too many people with calls and not enough with puts.  The other poster is correct.  Order imbalance just like a betting book with too many people betting on horse #5.  The market makers have too many people with calls. If you have calls and the stock closed at the high of the day after hours at $393 and change - and your call options have to be sold by Friday but really tommorow - what are you gonna due when the market opens?  You will sell because you know the other poeple with calls will be selling.

Just like NFLX earnings on 10/22/2013.  The difference is the day after that gap up was a Wednesday.  They had two days til options expiration and they sold at the open and it tanked.  Now those call owners have really one day.

James_Cole's picture

If you have calls and the stock closed at the high of the day after hours at $393 and change - and your call options have to be sold by Friday but really tommorow - what are you gonna due when the market opens?  You will sell because you know the other poeple with calls will be selling.

That's a separate discussion, maybe you see some movement on the weekly, but nflx is unstoppable.

Remember this:

Tyler outlined all the reasons not to buy nflx pretty well, 'cept none of that matters. 

Cult_of_Reason's picture

The date of that Forbes article is 8/27/2013

I suggest you check the latest data, NFLX short interest is at record low levels right now.

max2205's picture

Right...those are good

Stoploss's picture

They need an up day this week.

Expect minimal earns beats on lowered guidance to replace any liquidity "deficiencies", thereby resulting in a face ripping short eviscerating all out over the barrel pump fest the likes of which JJ has never seen or will see in her lifetime....

Rainman's picture

Why do humans waste so much time watching a machine ? ....ever hear of mother nature ?

Der Wille Zur Macht's picture

Why do people sit down and read pieces of paper with words on them for hours? Or listen to a needle riding a grooved plastic disk? Look at smeared oils on a canvas? Perhaps you have an issue with the electronic medium?

You can attempt to deligitimize watching a film by breaking it down into the individual components, but until you recognize that partaking of art is purely a matter of recreational and diversional aesthetics, then your point is null.

Rainman's picture

Art ? Duck hunting is an art. The season ends in 2 days. Think I'll go slay me a few quackers. 

CaptainSpaulding's picture

Netflix has that.  Sean Penn's Into the wild and Sydney Pollack's Jeremiah Johnson are both available for streaming

One And Only's picture

Have people not heard of torrents?

Harvery Weinstein blesses this technology.

Anyone at anytime can access any movie or tv show FOR FREE AND WITH NO COMMERCIALS OR ADS. can get blue ray quality movies that are still in theatres (sometimes movies that haven't even hit theatres yet!)

Equality and free content for all. Forward citizens!!!!

Wolf of

flacon's picture

That's what I do. I don't watch much anyway, but I did download the Amazing Race entire series and the last Survivor series. NO ADS!!! NO CABLE BILL!!! 

dark pools of soros's picture

yay you stole something!!  woo hoo!!   you got the balls to steal anything else??  like gasoline? someone's wife?  shotguns?  oh just a little digital cowpoke right?


so glad you don't pay for anything you enjoy but instead slave away to pay your taxes, utilities etc...



rustymason's picture

I tried to do the torrents thing but it was too complicated and took too long to download. It was confusing trying to find the right download(s), and then when you do, some of the downloads are full of bogus spyware and other Scheisse. Someone needs to streamline the thing and get rid of the flock of parasite links that infest every torrent site.

Jlasoon's picture

Screw torrents, try  

s o l a r m o v i e  . s o

It's what Netflix should be.  

One And Only's picture

It was too complicated? -------> any movie or show you want --------> downloand

Get it?

Why should people buy movies? They are entitlements. Everyone has the right to be entertained without paying for it.

Freddie's picture

Considering Hollywood loves and made The Entitlement King.  NFLX will get squeezed by AT&T, Comcast and Verizon plus any other ISP.  They will have to pay to use the highway.

dark pools of soros's picture

they said that years ago... fact is the other fat cats have terrible offerrings.. and when HBO GO breaks off the cable noose the game gets interesting

buzzsaw99's picture

because one can never pay a ceo too much: Netflix CEO Reed Hastings will see his scheduled base salary and stock options jump by 50% in 2014, according to a government filing by the company...

ebworthen's picture

And if he's smart he'll sell his stock.  What's funny is that Hastings has several times said the stock is way overvalued and being bought speculatively as in the .dot com bubble.  Though I am sure he has enough money from his salary so perhaps he will hold the stock options for a convenient tax deduction when the values tumble.

texas sandman's picture

When the ISPs are done charging Netfux for the bandwidth it sucks up on the last mile, this stock is worth zero.  Sell wisely.

Bangin7GramRocks's picture

Well his $100 billion dollar company did make $48 whole million last quarter! Shit, in 490 more quarters of growth, they might reach Apple profits. Steady as she goes!

Spungo's picture

"And to think I was going to short this shit!"

Stansberry had some advice about shorting things: never short based on fundamentals. Bullshit companies can go much higher than you would imagine.

Hindenburg...Oh Man's picture

even better is Ebay, which missed on REV, but is up on ICAHN

Divided States of America's picture

MS are a bunch of crooks...they downgraded EBAY last week so Carl I CAN ICahn could get his senile filthy hands on cheap shares....and then stock shoots up

Then MS upgrades INTC 2 days before the earnings and it turned out shitty and probably some Joo HF got to offload their INTC shares at higher prices.

Bunch of crooks Wall Street is.

Waterfallsparkles's picture

CNBC trying to make Ichan a Trillionaire.

AccreditedEYE's picture

You gotta love how people plow head on into these companies thinking that competition will never spring up and that the wheel has been re-invented and slapped with a patent. As Crazy Eddie used to say, these prices (valuations) are in-saaaaaneeeee

Catullus's picture

Aren't they just an Amazon cloud front end? Except amazon isn't on the hook for copyright distribution from their servers because Netflix is the marketing shell company making the arrangements to share the content. Not like you. Where if you house and allow someone access to your home network, you're a "pirate".

rustymason's picture

When will Netflix allow me to group my selections and watched movies, and to share my list(s) with family and friends? Extremely simple to do, but they won't do anything. Is their website code so bad it couldn't stand any such simple changes? Or are they so arrogant they feel like they don't need to improve?

yogibear's picture

Like CMG, and AAPL another herd momo stock.

Any real negative news and people head for the exits quickly.

augustusgloop's picture

Except that AAPL makes/made a lot of cash. still will be a cash cow for a long time. 

nakki's picture

As I've said before glorious days ahead. No one will ever have to work again, or leave the house. Malls go bust!! Sears, JCP bust!! Why even go to the grocery store drones will deliver your food via Amazon. Just sit at home watch Netflix and get on that computer and buy garbage made in China, and order that Domino's pizza bitches. 

ZeroPoint's picture

Netflix has CRAP content. This is just another GroupOn stock.

jbvtme's picture

ZP...have you read two-thirds?

delivered's picture

Cash flow is the key. Completed my own analysis and determined that most of the company's cash needs are coming from long-term debt, other liabilities, and some equity offerings. Cash is being consumed by increases in other assets and intangible assets (most likely securing or producing their own content). Problem is, this is one of the easiest areas to "cook the books" in the financial statements as by just a slight change in estimates, depreciation and amortization expense can be re-evaluated and adjusted to meet management needs. 

The real proof in the pudding will be when the company finally has to take a charge for over valued content on their books. Of course they will realize this as a "one-time hit" but anyone with half a brain realizes that they were under reporting expenses for years. As competition increases in this space and user growth slows, the real pain will start to be felt. 

But until then, the momo players will be in-charge and take every bit of good news to drive the stock higher. Amazing how easily the herds are fooled but then again, this is one of the key signs of an extreme bull market not focused on fundamentals anymore. Perfect stock to short (or buy puts) when the time is right but difficult right now given lack of any sanity in the market. 

Over the long-term, cash flow has been, is, and will always be the key financial result to understand. Netflix is a perfect example as their operating liquidity is not based on internally generated earnings/cash flow but external sources. A recipe for dissaster as company's that live from debt/credit markets providing liquidity also die by them. The only question is when.

Spungo's picture

It's probably not a good idea to post links to warez or moviez on this site.

starman's picture

welcome to land of ..........idiots!!!!!!!!!

toros's picture

Whatever happened to all those houses that no one could pay for? What did the banks do with them?

Spungo's picture

I'm surprised the author spelled faze correctly.