Netflix (NASDAQ:NFLX) does not Disappoint Investors, Shares Might Show Early Signs of Overheating
NEW YORK – Netflix (NASDAQ:NFLX) keeps moving from strength to strength as the company’s third quarter earnings announcement beat consensus estimates and shares touched $ 390 on Tuesday before falling back to more $ 330 after Carl Icahn announced he was selling his stake in the company. The primary drivers of Netflix’s bull run have been sustained subscriber growth and improving margins.
The DVD is dead, and the company gained 2.73 million net subscribers in its streaming business globally in the third quarter. One of the company’s advantages is their content advantage, and there seems to be a halo affect surrounding some of Netflix’s original series.
Most analysts have remained bullish on the company with some raising their price estimate. Others are less convinced, and they have kept their target price well below the current market price. However, now might not be the time for bearishness, especially as the streaming business continues to grow and the contribution margin is expected to reach 36 percent – it is currently 31 percent. International streaming is also expected to grow from 30 percent to 34 percent.
In addition, technology and development costs have fallen in 2013 after rising in previous years. This is giving the company additional operating leverage due to continued subscriber gain and consolidation in international markets. All told, expenses look to fall from 9.1 percent to under 7 percent.
Another plus has been the company’s effort to differentiate its services by launching original series such as Arrested Development and House of Cards. Both have been hits and have helped to fuel subscriber growth. Starting in 2016, the company will also have the rights to Starting 2016, Netflix will have the rights to show the movies produced by The Weinstein Company during the pay-TV window; this will give them an advantage over companies such as HBO (NYSE:TWX) and Showtime (NYSE:CBS).
However third quarter results were boosted by comparison to a week third quarter in 2012, and while the company’s prospects look fabulous there is a risk that share prices have overheated. In fact, this might be why Icahn has decided to sell his share. Furthermore, growth should begin to decelerate as the company has reached the same size as HBO. Netflix is a great company and represents the future of television, but the share prices might be overpriced and vulnerable to a correction, especially if the next quarter’s numbers do not meet expectations.