Netflix’s (NFLX) highly anticipated third-quarter earnings report smoked expectations, causing the stock to shoot up 20% in after-hours trading.
For the third quarter, streaming revenue grew 36%, surpassing $2 billion for the first time. Earnings per share came in at $0.12, well ahead of expectations for $0.05.
But, most importantly, subscriber growth beat estimates significantly.
Netflix added 370,000 domestic subscribers, beating estimates for 300,000 additions. The company also added 3.2 million international subscribers, well surpassing estimates for 2 million additions.
For the fourth quarter, Netflix said it expects 1.45 million new domestic subscriber additions versus expectations for about 1 million new adds. It also said it expects 3.75 million new international subscribers versus estimates of 3 million new international adds.
Running into the quarter, shares had been down more than 11% for the year—with downside driven by concerns about decelerating growth, content costs and competition. This followed a 135% gain in 2015.
Domestic subscriber numbers disappointed for the last two quarters. In its second quarter, the company added just 160,000 net domestic subscribers, missing its prior forecast of 500,000.
But the stock had bounced back since mid-summer, partly on rumors of a Disney (DIS) takeover.
Netflix headwinds have hovered over stock
Key investor concerns had put downward pressure on the stock earlier this year.
One of the most near-term concerns has been the un-grandfathering of plans, which prompted price increases for subscribers. This means longtime Netflix users that enjoyed lower prices than newcomers now have to pay full price.
CEO Reed Hastings clarified that by the end of the third quarter, the company had un-grandfathered 75% of the long-term members, and that it has boosted average selling price (ASP) by 10%.
New subscribers grew more than expectations, despite the Olympics taking place during the quarter.
Domestically, competition continues to ramp up. Netflix expects at least another $1 billion growth in spending in 2017. Meanwhile, Amazon (AMZN) will increase its efforts for new content, driving content spending higher for Netflix, according to Wedbush. Other services, like Hulu and Alphabet’s (GOOGL) YouTube are also ramping up their investments for new content.
But Netflix is upping its investments, too. The company said Monday it intends to release over 1,000 hours of premium original programming, up from over 600 hours this year.
“The Internet allows us to reach audiences all over the world and, with a growing base of over 86 million members, there’s a large appetite for entertainment and a diversity of tastes to satisfy,” Hastings said in the release.
Hastings added the company’s investments will create long-term value but will hinder free cash flow in the near-term.
And after launching in over 130 countries in January, Netflix’s global expansion opportunity has been questioned, along with profitability upside for these efforts.
For international growth, the first quarter saw strong growth at 4.5 million net subscriber additions, but the second quarter’s disappointing 1.5 million subscriber additions called into question whether the initial surge was merely pent-up demand and if it can continue.
The third quarter’s surge in international growth seems to confirm upside momentum and continued potential for investors.
The series premieres of “Stranger Things,” “Narcos” season two, and Marvel’s “Luke Cage” in the third quarter boosted subscriber growth as well, according to the company.
Key tailwinds and upside potential remain
Positive call-outs from Netflix management include continued distribution relationships like the Comcast X1 and Liberty deal. Disney content will also start coming in the fourth quarter.
Long term, there is considerable upside for the company from its current 47 million subscribers, according to RBC’s Mark Mahaney.
“If Netflix’s value proposition continues to build out, the average media network household penetration levels suggest much higher long-term Netflix subscriber levels,” Mahaney wrote.
Plus, there remains a large monetization gap between Netflix and media networks like AMC, CBS, Fox News and CNN—with half the revenue per hour of viewership, suggesting more upside.
“The consistently greater engagement by Netflix users vs. other key media networks suggests that Netflix’s monetization can rise materially,” Mahaney said, adding that US profitability could grow 5 to 10 times its current levels.
The bottom line: Netflix has proven the nay-sayers wrong … for this quarter at least.
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