Wall Street's love affair with Netflix is on again. The streaming-media company's stock soared to more than five times its price the same time a year ago after it announced strong earnings on Oct. 21. Billionaire investor Carl Icahn, who pocketed about $645 million after selling a portion of his Netflix shares the next day, tweeted, "I want to thank the Netflix team for a job well done."
What rekindled the fire? For one, Netflix quadrupled its earnings year over year. More impressive: the company revealed that it now has more than 40 million subscribers worldwide. With 29.9 million paying customers in the U.S., Netflix likely has more American subscribers than pay-TV behemoth HBO, according to estimates from SNL Kagan.
That figure is particularly important because of the transformation Netflix is attempting. Once dependent on costly agreements with traditional content creators to populate its service, the Los Gatos, Calif.--based company has begun financing its own original programming. An estimated $150 million of the $2.5 billion it is spending this year on acquiring content is going to bankroll Netflix-only programs such as Orange Is the New Black and House of Cards. (Amazon, Hulu and YouTube are trying to do the same.)
CEO Reed Hastings attributes much of Netflix's rally to the positive response to such shows. House of Cards became the first online program to win a prime-time Emmy in September. Arrested Development's much hyped revival kept Netflix in headlines for weeks leading up to its May debut. And sleeper hit Orange Is the New Black is on track to be Netflix's most watched original show by the end of the year. "It's undoubtedly helped them grow," says Dan Cryan, research director for digital media at IHS Screen Digest.
The results are a reversal for Netflix, which suffered a disastrous stumble two years ago when a plan to spin off its DVD-rental business outraged subscribers. Still, its transition is risky. Shows could always flop, or stars might walk away. Michael Pachter, an analyst at Wedbush Securities, says Netflix may also have a hard time sustaining profits. Not only will it have to pay for expensive original content, but it will also have to maintain costly deals that allow it to stream older films, documentaries and TV shows, all while keeping its subscription price at $7.99 per month. "As you start seeing Netflix not making as much money, they have to raise the price," Pachter argues. "If they charge [more], that will place pressure on subscriber growth." And that could sour the romance with investors.