Netflix's soaring stock price: How the company came roaring back

The movie-streaming service posts an unexpected profit for the fourth quarter

"Arrested Development"
(Image credit: Frederick M. Brown/Getty Images)

This week, Netflix posted an $8 million profit for the fourth quarter of 2012, largely due to better-than-expected subscriber growth for its movie-streaming service. The report defied analysts' projections that the company would post a loss, and Netflix's share price has since surged to about $140, up from its closing price of $103.26 on Wednesday.

Netflix's strong fourth quarter capped a volatile year that saw great upheaval in the industry. The growing popularity of movie-streaming has pitted Netflix against a host of competitors — including Amazon, HBO, and Verizon — that are snatching up content deals with various television and movie studios. The result has been that Netflix has to pay more and more for content, while having no access to popular shows and movies produced by studios that have taken their business elsewhere. Investors naturally assumed that Netflix's subscriber growth would slow and profits would fall.

On top of that, Netflix is still struggling to make amends for its disastrous decision in 2011 to split its business in two, a move that nearly doubled prices overnight for customers who subscribed to both the streaming and the DVD-by-mail services. Indeed, Netflix's share price remains well below its high of about $300 in 2011.

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And yet, Netflix's latest quarterly report, which showed the company with 27.2 million subscribers, has changed many investors' minds. Some analysts say Netflix has chosen the right content from a fractured field. Others point to Netflix's huge investment in producing its own shows, including the forthcoming political thriller House of Cards and the beloved comedy series Arrested Development. In addition, Netflix remains the biggest video-streaming service at a time when customers are increasingly buying tablets, smart televisions, and other products that are natural fits for internet-based entertainment.

"It's risen from the ashes," Barton Crockett, a senior analyst at Lazard Capital Markets, tells The New York Times. "A lot of investors have been very skeptical that Netflix will work. With this earnings report, they're making a strong argument that the business is real, that it will work."

"It's clear that they've recovered from their snafu of splitting the company up," Jason Helfstein, an Oppenheimer & Co. analyst, tells The Wall Street Journal. "They are smartly buying more content that customers want and you can see the result in better subscriber numbers."

However, some investors aren't as optimistic, citing the fact that Netflix's content costs are only going to continue climbing. "I think the company is genuinely mistaken in how it thinks it is going to manage content costs," Michael Pachter, an analyst at Wedbush Securities, tells the Associated Press. "This is truly a house of cards and it's going to come crashing down this year."

For his part, Netflix CEO Reed Hastings says the company has a long way to go before it can fully win back the trust of its customers. "It wouldn't take much for the issue to flare up again or for us to lose trust," he said on a conference call. "You might say we are on probation at this point, so we are not out of jail."

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