Netflix's (NFLX) - Get Report aggressive investments in content have paid off yet again, as the streaming powerhouse smashed Wall Street (and its own) expectations for new subscribers in the fourth quarter.
After Wednesday's market close, Netflix said it added 1.9 million U.S. subscribers and 5.1 million international subscribers, trumping consensus estimates of 1.4 million domestic and 3.7 million overseas subscribers.
The Los Gatos, CA-based company also beat on its top and bottom line for the period, reporting adjusted earnings of 15 cents per share on revenue of $2.48 billion, higher than analysts' projected 13 cents per share and $2.47 billion in revenue.
The stellar results catapulted Netflix stock to an all-time high, with shares up 6.0% to $142.26 on Thursday morning. The stock has increased more than 14% so far this year.
Netflix continues to benefit from a flywheel of subscriber growth, largely due to its arsenal of original content. The company clocked in 600 hours of original content (hallmarked by releases such as Stranger Things, The Crown, Orange Is the New Black and others) and plans to ramp that number up to 1000 hours in 2017.
Netflix doubled down on those efforts last year by launching a major global expansion and now exists in 130 additional markets. In all, Netflix added 7.05 million net new subscribers globally during the quarter, higher than its previous forecast of 5.20 million.
"This was the largest quarter of net additions in our history and was driven by strong acquisition trends in both our U.S. and international segments," the company said in its letter to shareholders.
Netflix noted that it has another packed slate of content prepared for launch this year, buoying its upbeat subscriber and earnings outlook for the first quarter of fiscal 2017.
Aside from some modest concerns about free cash flow burn, Wall Street was largely optimistic about the streaming juggernaut's fourth quarter results, issuing a slew of price target increases. Here's what they had to say:
Youssef Squali, Cantor Fitzgerald (Overweight, Price target raised to $160 from $135)
"We're maintaining our Overweight rating on Netflix, and raising our PT to $160 from $135 on the back of the company's best quarter ever for customer net additions, which drove a beat on virtually every metric. The company's model of launching high-quality originals, rolling out the service worldwide on a massive scale, localizing content and instituting price hikes when appropriate has been working, fueling strong y/y growth, which we view as sustainable."
Tim Nollen, Macquarie (Upgraded to Neutral from Underperform, $130 PT)
"We're not going to fight the trends: Netflix is doing a good job driving subs with a wealth of content that is proving popular. Further risks include FX rates (especially with a fast-rising international base), and any potential net neutrality regulation changes, given Netflix's reliance on internet streaming - not to mention valuation on a stock that is priced to perfection."
Bryan Kraft, Deutsche Bank (Hold, $110 PT)
"4Q results and mgt's guidance for 1Q and FY17 point to stable to better subscriber trends in the U.S., combined with increasing demand globally, particularly in Europe...Mgt's outlook also supports our view that the international opportunity will require more investment than some expect and, in fact, the guidance for international contribution margin and consolidated free cash flow deficit was more negative than we had expected. We continue to view Netflix's business outlook and growth opportunity favorably, however, at this valuation level, we don't see a favorable risk/reward."
Andy Hargreaves, Pacific Crest Securities (Overweight, PT increased to $170 from $135)
"Netflix's tremendous growth over the last two quarters suggests that concerns about pricing power and market saturation that were prevalent in 2016 are incorrect. In 2016, Netflix drove a double-digit increase in pricing (on an FX-neutral basis) while adding 19 million subscribers., which dwarfs traditional competitors' combined efforts in SVOD. We believe the company's size is likely to continue driving a flywheel effect that is likely to accelerate Netflix away from traditional media companies and new entrants."
Doug Anmuth, JPMorgan (Overweight, PT increased to $175 from $140)
"Quarter by quarter the value of Netflix originals continues to grow, with 100% self-produced content becoming a greater portion of the originals mix in '17. Netflix originals were 5 of the top 10 most searched TV shows on Google in 2017 and originals' share of viewing likely far outweighed their ~20% of total content budget last year."
Michael Olson, Piper Jaffray (Overweight, PT increased to $166 from $138)
"Netflix reported a very strong Q4, with Q1'17 guidance also ahead of expectations. This quarter's earnings report provides further evidence that concentrating on quarter-by-quarter nuances in the numbers (such as churn issues caused by un-grandfathering earlier in '16) can mask an otherwise positive trend. Simply put, Netflix is the leader in a category that contains very sizable growth potential."
Mark Mahaney, RBC Capital Markets (Outperform, PT raised to $175 from $150)
"Netflix is reaching critical mass with consumers in an increasing number of countries based on its user experience, content and pricing. And although it faced elevated churn in mid-'16 due to price increases; it did succeed with the price increase....Cash burn remains high -- $2 billion free cash flow in '17 -- but this should be the peak burn year."
Anthony DiClemente, Nomura (Buy, PT increased to $165 from $130)
"By far the biggest surprise of the quarter was the strength of Netflix's international subscriber addition guidance. While many expected 1Q17 international net additions to be down ~30% y/y, guidance calls for a far less severe y/y decline....While free cash flow burn will be greater in 2017, we justify our target price increase with the thesis that, as Netflix scales globally, it has proven out a clear path to profitability as long as subscriber growth continues, which it is."
John Janedis, Jefferies (Underperform, PT raised to $95 from $80)
"Mgmt highlighted that the success of key original programming likely pulled forward sub growth from early '17, driving higher than expected sub acquisitions in the quarter. In 1Q17, we expect that the mix shift in programming to more new original launches (vs returning originals) could drive a sequential slowing in sub growth."
Stephen Ju, Credit Suisse (Neutral, PT raised to $143 from $133)
"...For the longer term, Netflix will be looking to show a greater balance between growth and profitability -- which to us validates the long-term investment thesis for its international and newer cohorts to follow along the margin expansion trajectory of the U.S."
Daniel Salmon, BMO Capital Markets (Market Perform, PT increased to $150 from $115)
"We remain on the sidelines in part due to the global launch of Amazon's AMZN Prime Video at a ~20% lower cost, but note Netflix's results are a good reminder that IP-delivered TV is still in its infancy, there is room for multiple winners, and global rollouts like Prime's help bring attention to all OTT services."
Michael Graham, Canaccord (Buy, PT increased to $160 from $140)
"We believe Netflix is still quite early in penetrating international markets, and its content strategy seems poised to continue to help subscriber growth as we enter a phase of heightened subscription video on demand competition, especially in the U.S."