Netflix, Inc. (NFLX) Stock Jumps on Huge Earnings Beat

John Divine

Netflix, Inc. (ticker: NFLX) reported third-quarter earnings after the bell on Wednesday and the market reaction was euphoric, despite the company missing analysts' predictions on its number of new subscribers.

Netflix stock added 8% in after-hours trading shortly after the release.

Netflix announced earnings per share of $1.47, better than the $1.04 that analysts expected. Revenue of $5.24 billion came in just short of expectations.

NFLX gained 6.8 million subscribers in Q3, which was below the 7 million subscribers the company projected it would add just three months ago. Netflix also announced it expected to add 7.6 million subscribers in the fourth quarter, less than the 9.5 million net additions Wall Street expected.

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Although Netflix is the world's largest streaming video platform -- it now has 158 million paid subscribers globally -- the Los Gatos, California-based disruptor can't simply rest on its laurels and expect to remain king of the hill.

The company has always competed with the likes of ( AMZN) Prime and Alphabet's ( GOOGGOOGL) YouTube, but the coming year will see a flurry of new major entrants in the space.

Walt Disney Co. ( DIS), which now owns a controlling 60% stake in Hulu as well, is launching its highly anticipated Disney+ streaming service in November. It's not just "Beauty and the Beast" Netflix investors should be wary of -- Disney owns Marvel, Pixar, the Star Wars franchise and a diverse basket of former Twenty-First Century Fox holdings, including Fox itself and FX. At $7 a month, the service is essentially half the cost of Netflix's $12.99 standard plan.

Apple TV+ is launching Nov. 1 for the lowly price of $4.99. Even AMC ( AMC) is joining in the fun, announcing a streaming on-demand service just yesterday.

International Growth

Netflix's status as a growth stock would've faded long ago if CEO Reed Hastings was content to dominate the U.S. streaming video market. He's not.

U.S. subscribers grew by 520,000 last quarter to 60.62 million; in contrast, international subscribers grew by 6.26 million to 97.71 million in the third quarter.

Despite technically missing Wall Street's expectations for subscriber gains in Q3 and also missing Q4 subscriber guidance expectations, NFLX investors should be happy with the stock. The cash cow is still the U.S., and after domestic subscribers fell in the second quarter (for the first time since 2011), investors should be happy to see that segment growing again.

A Testament to Management

The fact that NFLX shares are soaring despite subscriber numbers that didn't shock and awe is a testament to investor belief Hastings, Chief Content Officer Ted Sarandos and the rest of the company's executive team.

In the shareholder letter, the company emphasized that when it forecast 7 million additional subscribers for Q3 in the last earnings report, those estimates were real, internal numbers. That matters, because public companies often intentionally guide conservatively so they have a low bar they know they can beat.

The company proudly noted that the addition of 6.8 million new members made its 7 million estimate its "most accurate in recent history." When companies like NFLX make a point to emphasize accuracy shareholders appreciate it, because it reduces uncertainty.

For the cherry on top, NFLX said that from next quarter on it will get more granular with reporting numbers, breaking down revenue and membership by region instead of just the two broad buckets of U.S. and international.

Looking Ahead

Netflix is an extremely rare breed of company that, with annual revenues around $20 billion, is still expecting revenue growth of 30% in Q4.

Since it can't grow much more in the U.S. (there are only so many households), the company continues churning out great content and decided to raise prices $2 a month earlier this year. The market has tolerated it, and original hit series like "Stranger Things" and "Orange Is the New Black" help retain and attract members.

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The devotion to create custom content for foreign countries is paying off, and difficult for all but the most devoted competitors to replicate. NFLX has released what it calls "100 seasons of local language, original scripted series from 17 countries" thus far, and has plans for over 130 more in 2020.

While Q3 earnings, which grew 65% year-over-year, aren't consistently replicable, they represent a healthy and dominant entertainment giant -- and one that isn't afraid to be confident and transparent with shareholders.

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