Apr 22 -Netflix scored a blockbuster in the first quarter with earnings topping forecasts, revenues hitting a billion dollars, and net new subscriber numbers exceeding forecasts, but the company and the stock still has its critics. Conway G. Gittens reports.
Forget about the Walking Dead, Netflix is back from the grave. Profits have either risen or steadied for the past four quarters, bouncing back from losing money a year ago, and revenues topped the one-billion dollar mark for the first time in company history. More importantly - net new U.S. subscribers hit 2.03 million, which was ahead of estimates; and total subscribers were at the high end of targets, which means more of Netflix's existing customers stayed on than predicted. But Michael Pachter of Wedbush Securities is not buying into the re-birth story line. He says original content like "House of Cards" is likely stealing from future subscriber growth. SOUNDBITE: MICHAEL PACHTER, RESEARCH ANALYST, WEDBUSH SECURITIES (ENGLISH) SAYING: "I think that the originals "House of Cards" and "Arrested Development" are borrowing future subscribers from the second-half of the year and accelerating their membership in the first half of the year. So I think they are going to be challenged to grow in the September quarter because their original content is nowhere as compelling as "House of Cards" and "Arrested Development." But investors see more signs of life ahead. The stock surged at least 20 percent in the minutes after the earnings release. And is up 224 % from the closing low set back in the fall of 2012, when the company was basically left for dead by a series of missteps and customer uproar. The recovery, however, still has a ways to go with the stock down over 40 percent from its all time high. SOUNDBITE: MICHAEL PACHTER, RESEARCH ANALYST, WEDBUSH SECURITIES (ENGLISH) SAYING: "I think that investors have been lulled into a sense of false trust that Netflix knows what it is doing and that it can pull a fast one on the content owners. It's just not true. The content guys are keenly aware of how much Netflix makes. They are not going to allow Netflix to extract economic rent from their content. It's just not going to happen. So I think that valuing Netflix at $12 billion is crazy, because I think Netflix is destined to make $100 million, $200 million, $300 million in profit. They are never going to make a billion dollars. They are just not going to be allowed to." And connected with that, as more competitors like Amazon Prime, Redbox and others come on line they push content costs up and that will hurt Netflix's bottom line. But for now "growth" is what's hooking investors. And Netflix hopes it can continue to hook new subscribers fast enough to pay for what is sure to be higher costs. The question is - can they do it without creating a house of cards, which can come quickly come tumbling down.