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It is always nice owning a stock that pops after a set of good results. On Wednesday night after their third quarter numbers, the Netflix share price jumped up by around 10%. The results were mixed but profits came in at $665 million for the quarter, higher than the $470 million estimated by Wall Street.
Netflix continues to add millions of people to its ecosystem every month; subscribers increased by 6.8 million in Q3. Specifically, in the US, there was an increase of 500 000 new subscribers for Q3, a reversal from the loss of 126 000 subscribers in Q2. The company forecasts that in Q4 they will add a further 7.6 million people worldwide.
Probably more impressive than the continual increase in subscribers is the company's ability to increase its average revenue per user (ARPU). In Q3 the ARPU increased by 12%. Thanks to increasing subscribers and increasing monthly subscription fees, revenue climbed by 31% to $5.2 billion.
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All the numbers above look great. The biggest concern about Netflix is their debt burden and the billions more that they will need to spend on content creation to stay relevant. Even though the company made a profit, their free cash flow for the quarter was negative $551 million. As long as they can continue to increase subscribers and ARPU's the negative cash flow is not a problem. If the growth slows, they might be in trouble.
When talking about their competition in the streaming space, Netflix notes that they are all creating a new market for streamed content. As it stands, their main competition is still 'linear TV' and not streamed content. Given how many people watch TV globally, and how few of those people do it online, I would say Netflix still has a huge well of untapped customer potential.
For now, Netflix is still a risky 'start-up' that is burning through cash. Once streaming TV becomes a mature business I think they will be a significant player, among many other players, and the business will be a massive cash-cow.