Counterparties: Netflix’s contented quarter

April 23, 2013

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Analysts may have made a huge mistake in lowballing estimates of Netflix’s subscriber growth. Thanks in part to the acclaim of House of Cards — and maybe in anticipation of new episodes of Arrested Development — Netflix was able to add 2 million new streaming subscribers in the US in the first quarter. Its streaming subscriber base is now 29.2 million in the US, or 200,000 more than was expected.

Zach Seward has more promising data points from Monday’s earnings release:

  • Netflix now has more American subscribers than HBO (29.2 million vs. 28.7 million)

  • Netflix is now the most watched “cable network” in the US (U.S. households spend 87 minutes per day using the service, more than any other cable outlet)

  • Netflix is the S&P’s best performing stock of 2013 (up 134% to date)

Netflix shares have a lofty price to book ratio of 13.1, nearly as high as Amazon’s 13.9. Analysts are scrambling to catch up with investors’ bullishness: “At least eight brokerages raised their price targets on the stock by as much as $75 to as much as $250,” Reuters reports, in an echo of the last time Netflix’s stock decoupled from its fundamentals.

Derek Thompson says that Netflix’s quarter was an “epic win” and shows that its grand strategy — “Step 1: Buy original content; Step 2: Add subscribers; Step 3: Profit” — is paying off.

But that last part of the strategy, the profit, has been muted. Despite the jump in subscribers, Netflix’s net income was just $3 million on revenue of $1 billion. Moreover, Netflix’s cash flow is deteriorating and the company has off-balance sheet liabilities equivalent to 76% of its assets, as ZeroHedge points out.

Even the positive signs — like the uptick in the streaming business’s operating margin to 20.6% from 19.2% — could end up being temporary. As Felix wrote last year, Netflix’s content costs are unpredictable: “any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears.” Peter Rudegeair

On to today’s links:

Apple reports $43.6 billion in revenue and $9.5 billion in profit – Apple
Apple will return $100 billion to shareholders by 2015 – WSJ

New Normal
Household wealth is up, but only for the top 7% – Pew Social Trends

7 large financial companies are actually listening to the Fed and scaling back pay – WSJ

Mea Culpas
Reddit apologizes for “online witch hunts and dangerous speculation” – The Verge

The thoroughly unimpressive US economy – Cullen Roche
Today’s massive market plunge, in full perspective – Ben Walsh

Actually, student loans are a major drag on the economy – Mike Konczal
Student loans aren’t destroying the economy – Derek Thompson
“The slowdown in economic activity is right on schedule – for the 4th year in a row” – Sober Look

New Normal
The quiet humanitarian disaster of long-term unemployment – Felix
“We are creating a permanent class of jobless Americans” – Paul Krugman

Billionaire Whimsy
Bloomberg is getting into the online investment advisory business – Bloomberg Black
Bloomberg is trying “to disrupt the financial disruptors” – Josh Brown

“The Urban customer… is the upscale homeless person” – BuzzFeed

“An open-source plagiarism detection engine” – The Atlantic

Startup CEOs, stop raising money just because you can – Bryan Goldberg

Vimeo founder’s ‘brilliant scam': Apply here to build him a bathhouse – Nitasha Tiku

Why the rich are rich: luck – Businessweek

HSBC breaks new ground in corporate doublespeak, announces it will “demise” 1,149 employees – The Times

Some really troubling manufacturing data from the world’s biggest exporters – Reuters

And, of course, there are many more links at Counterparties.


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