Netflix had an awful 2011, but fourth-quarter earnings and strong subscriber growth suggest better things in 2012.
LOS GATOS, Calif. (TheStreet) - Netflix(:NFLX) had a tumultuous 2011, but following fourth quarter earnings results, 2012 may prove to be a year of recovery, according to analysts.
2011 was a dismal year for Netflix. The company instituted a dramatic 60% price hike without giving customers additional services. It also unveiled a plan to split off its DVD-by-mail operation into a separate business, Qwikster. CEO Reed Hastings later backed off on Qwikster but his credibility took a hit with both consumers and Wall Street. Hastings was voted the worst tech CEO of 2011 by TheStreet readers.
While concerns about the DVD business slowing are valid, (the company lost 2.76 million DVD subscribers in the fourth quarter), Netflix's streaming business is much more robust, the company adding 221,000 streaming subscribers.
Despite the headwinds from 2011, Netflix subscriber growth appears to be rebounding in 2012. Overall, the firm added 990,000 international and domestic subscribers during the quarter.
Hudson Square analyst Daniel Ernst, who upgraded Netflix back in October, said that his reversal thesis in subscribers is playing out. Ernst has a buy rating, and raised his price target from $110 to $125.
The addition of 221,000 streaming subscribers handily beat many Wall Street estimates. Streaming margins increased to 10.9%, better than Wall Street estimates, and the company's own 8% margin estimate. Going forward, Netflix expects streaming margins to rise 100 basis points per quarter. 100 basis points equals 1%.
"From these results it is clear Netflix remains well positioned to capitalise on the secular growth of online streaming," Atlantic Equities analyst James Cordwell wrote in his research report. He upgraded shares to neutral from underweight and raised his price target to $115 from $70.
Netflix shares have been the best performing stock in the S&P 500 year-to-date, gaining 63.5%, according to Google Finance.
As of the fourth quarter, Netflix had 21.7 million domestic streaming subscribers, 873,000 above J.P. Morgan analyst Doug Anmuth's estimate. Anmuth noted in a research report that the company's earnings and guidance "suggest the company has likely turned the corner in terms of subscriber growth and profitability trajectory." He raised his price target to $95, but kept his neutral rating.
Oppenheimer analyst Jason Helfstein was also very positive on Netflix, raising his price target nearly 40%, from $90 to $130, as he believes the company is starting to recover from the gaffes it made in 2011. "Netflix appears to be successfully navigating its decision to change the pricing of its service, with subscriber growth expected to accelerate in 1Q:12," Helfstein wrote in a research report. He rates shares outperform.
Netflix reported fourth-quarter earnings of 73 cents per share on revenue of $876 million, handily beating Wall Street estimates. Analysts polled by Thomson Reuters expected Netflix to earn 55 cents per share on $857.89 million in revenue.
In a statement, Netflix cited the rise of TV Everywhere, in particular HBO GO, and Showtime's offering as its biggest competitive threats. HBO is owned by Time Warner(:TWX) and Showtime is owned by CBS(:CBS). Netflix also considers Amazon(:AMZN) Prime and Hulu Plus among its competitive threats. Netflix expects Amazon to offer a standalone subscription service in addition to Prime.
For the first quarter, Netflix said it expects to post a loss of between 16 cents and 49 cents a share on revenue between $842 million and $877 million. Wall Street analysts polled by Thomson Reuters expect a loss of 30 cents a share on $847.8 million in revenue.
Shares of Netflix are soaring in Thursday trading, gaining $20.88, or 21.97%, to reach $115.92.
Interested in more on Netflix? See TheStreet Ratings' report card for this stock.
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--Written by Chris Ciaccia in New York
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