NEW YORK ( TheStreet) -- Internet stocks fared well in the third quarter, and the fourth-quarter is poised to be strong for the three major players.
Netflix's ( NFLX) stock has gained more than 14% since it reported third-quarter earnings on Wednesday, reaching an all-time high of $174.94. But is this rally warranted? While the movie rental site missed earnings expectations, reporting a profit of $38 million, or 70 cents a share, one cent shy of estimates, its subscriber growth continue to bests forecasts and investors are more focused on the growth of its streaming service. During the quarter, Netflix gained 1.9 million new customers, a 90% surge from a little over 1 million new users in the second quarter. This marked the fourth consecutive quarter of more than 1 million new subscribers. The boost in users was driven by the launch of the Canadian streaming service in September, as well as new distribution platforms like Apple's iPad and TV, as well as Internet-enabled televisions and Blu-ray players. The company also upped its forecast for subscriber growth, and is now expecting between 19 million and 19.7 million subscribers by the end of the year, compared with a prior guidance of 17.7 million to 18.5 million. Netflix is openly moving from a DVD-by-mail company to a streaming company, as the number of users who streamed content for more than 15 minutes was 66%, up from 41% in the third quarter of 2009 and 61% in the second quarter of this year. "By every measure we are now a streaming company, which also offers DVD-by-mail," CEO Reed Hastings said in a statement. Netflix also plans to expand internationally starting in the second-half of 2011. On the downside, content costs are rising. In the third-quarter content costs were higher due to an up-front payment to EPIX, which drove gross margins down to 37.8% from 39.4% in the second quarter. The biggest concern for Netflix is how much longer it can continue to grow at the current pace, with several analysts predicting expansion could slow by as early as next year. "In our view, the current valuation does not reflect the ongoing challenges in acquiring additional streaming content, nor the increasingly competitive landscape, as well-funded competitors (Google, Hulu, Apple) ramp up offerings," Susquehanna Financial analyst Marianne Wolk, wrote in a note.
EBay's ( EBAY) big story in the third quarter was its PayPal service. The Internet retailer reported a 23% surge in profit to $432 million, or 33 cents a share, compared with $350 million, or 27 cents, in the year-ago period. Excluding one-time items, eBay actually earned 40 cents a share, three cents more than Wall Street's forecast. eBay originally said it expected earnings in the range of 35 cents to 37 cents per share. Revenue reached $2.25 billion, also ahead of estimates of $2.18 billion. PayPal reported a 22% surge in revenue to $838 million. The market is awaiting next week's PayPal Developers Conference for any more good news out the business. But is the momentum at the PayPal unit enough to justify a buy of eBay's stock? "EBay shares are undervalued on a sum-of-the-parts basis, which in combination with PayPal's strategic positioning and strong balance sheet could make it attractive to potential financial or strategic acquirers," Wolk wrote in a note. EBay's core marketplace, while still in the midst of a turnaround, saw revenue grow 3%, slightly ahead of analysts' outlook. Management's tone is also more confident as it issued fourth-quarter forecast ahead of Wall Street's expectations and raised its full-year revenue guidance. For the fourth quarter, the company predicts revenue between $2.39 billion and $2.49 billion, and earnings in the range of 45 cents to 48 cents a share. Analysts are looking for a profit of 44 cents a share on revenue of $2.4 billion. For the year, its calling for profit between $1.67 and $1.70 a share, with sales of $9.05 billion to $9.15 billion. In July, EBay predicted earnings of as much as $1.65 and sales of up to $9 billion. Separately, eBay said on Thursday it is issuing its first-ever bonds, selling $1.5 million in debt in a three-part sale. In doing so, eBay became one of the few companies to issue debt at record low rates.
Amazon ( AMZN) was the disappointer of the group, as shares are trading lower following its third-quarter report. Investors are penalizing Amazon for its weak gross margins and earnings that didn't provide much of a surprise. During the quarter, the Internet retailer earned $231 million, or 51 cents a share, compared with $199 million, or 45 cents, in the year-ago period for Amazon. Revenue surged nearly 40% to $7.56 billion. Analysts were calling for a profit of 48 cents a share on revenue of $7.35 billion. Operating income came in at $268 million, compared with estimates of $289.5 million, sending margins to 3.5%. Soft margins are weighing on the stock, sending shares of Amazon down more than 4% after it reported its results. But analysts are looking beyond this margin hit, saying Amazon is making the right moves for the future. "Amazon is investing significantly for long-term growth, particularly in high growth geographies such as China, categories such as apparel ... and the transition from physical to digital media," Wolk wrote in a note. These initiatives, and Amazon's move to add new fulfillment centers around the world, are resulting in higher costs. "In our view, this is the right decision for the long run, given Amazon's attractive prospects and its high return on invested capital, notwithstanding the near-term impact on margins," Credit Suisse analyst Spencer Wang wrote in a note. "Ultimately, we believe value creation is driven by increasing profit dollars as opposed to profit margins." --Written by Jeanine Poggi in New York. >To contact the writer of this article, click here: Jeanine Poggi. >To follow the writer on Twitter, go to http://twitter.com/jpoggi. >To submit a news tip, send an email to: email@example.com.