Netflix Inc. Up 24% Since Reporting Q3 Earnings -- What Now?

By Markets Fool.com

In this segment from Market Foolery,Chris Hill and Million Dollar Portfolio's Jason Moser first review the third quarter earnings report from Netflix(NASDAQ: NFLX)before stepping back to consider what the company is doing right, where its biggest opportunities lie, and some potential obstacles it will need to face off in the coming years.

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A full transcript follows the video.

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This podcast was recorded on Oct. 18, 2016.

Chris Hill:Let's start with Netflix, though. Third quarter profits and subscriber growth came in much higher than expected and the stock up 18%, 19% this morning. Holy cow.

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Jason Moser:Didn't it do the opposite last quarter?

Hill:Yes.

Moser:This is basically like the other side of the coin.

Hill:The number of analysts who have come out over the last 12 months and said some version of the following statement, "This is a really tough company to predict," I'm starting to believe them. I'm starting to believe them when they say that it's not just, "I got this one wrong." It seems like streaming in general is a tough space for a lot of analysts to get their head around, but Netflix especially in this case, a lot of people getting this one wrong.

Moser:I think they've answered certainly the question in regard to, at least in the near term, the health of the business. The concern over subscriber growth was warranted, I think, to the degree that the space has gotten far more competitive now than it ever has been. It probably is getting somewhat saturated here domestically. Then the big question is international growth and what kind of opportunity is there. They completely blew past the expectations for that subscriber growth internationally. That obviously is a big plus. They forecast continued strength in that international segment. This is all in the face of really what looks like now not really much opportunity in China, when before, I think, there are probably a lot of people thinking that might be actually a big opportunity.

Netflix is a tough one to wrap your head around in that they have to generate all of these different sorts of streaming agreements, these licenses and whatnot, which is why they're doing more and more of their own content. I think that's going to prove out to work very well for them in the long run. We've seen HBO's numbers and how that works. It really does translate into very attractive growth at the end of the day. It just takes a while to implement. I think that being the first mover in the space was certainly a big advantage for Netflix, and it doesn't hurt that they're led by a very driven, and passionate, and smart guy in Reed Hastings.

I feel like Reed Hastings is a guy we probably held under a microscope here for some time. Everybody I guess make mistakes, and missteps, and whatnot, but he genuinely to me seems like a guy who's grown a lot as a CEO and as a leader. I think he's done a phenomenal job with his business. It's hard finding anything really wrong with what they're doing.

Hill:Just to put some numbers behind it in terms of what was expected, in terms of subscriber growth. In the U.S., 300,000. They added 370,000 internationally. As you indicated, their expectations of 2 million new subscribers. They got 3.2 million. It just seems like from a programming standpoint what they have done in the U.S. seems like it can pretty nicely translate to other countries, other regions. What I mean by that is not necessarily, well, we made it here. We'll just send it everywhere but just the approach of ... it really does seem like they are pretty hands-on in terms of their programming, in terms of original programming, helping to shepherd projects along.

I'm sure I've mentioned this the last time we looked at their quarterly report. If you just look at the category of comedy in the way that they have built out original comedy, not just scripted series but also specials, that sort of thing, that's the kind of thing that will easily translate into other countries.

Moser:Yeah, I think so. I think that you're going to see more and more of that hands-on nature. They said in the shareholder letter that when it comes to licensing out the produced material versus being the actual hands-on producers and creators of content, they find that being the actual hands-on producers and creators of the content is less expensive in the long run because it gives them more control. It gives them actually the freedom to give the producers and creators the control to produce what they know their viewers want. Then that is content that they genuinely own for a long time to come. Eventually it's paid for and just translates into nothing but profitability.

I think probably the one challenge -- and this is not particular just to Netflix, I think it's just around the entire space -- is that with the concept of binge-watching now, I think that these shows don't live quite as long of a life, which it makes it more expensive to run this style of business. If you go back in time and you think about what HBO has done, they were the pioneers of this original content notion. They've done really well with it. The Sopranos I think is a good example of a show that really was able to live a very, very long life, and it's still even relevant today. People subscribe to HBO just so they can watch The Sopranos.

I think that now because of this binge-watching, they just don't live the same life. It's not just binge-watching, but it's because there's so much competition out there, there's so much content out there now. I don't understand how anybody has the time to watch it all. It seemed like people are TV watching and maybe that's a testament to what's ultimately going on in the country right now. I don't know. I know for me there's way more content out there than I could ever have time to watch. I think that it becomes a matter of really having great content. I think that Netflix is doing a good job of bringing really compelling content to the forefront.

I think the dark horse here -- it's worth mentioningAmazon. I think Amazon a few years ago, we didn't really give them the time of day where this is concerned. They've actually come through some pretty good stuff as well. I think that's an interesting play right there just because they offer that streaming business as a stand-alone purchase subscription, but we also know that you get it as a Prime member. We don't really look at it as close up as we do with Netflix. Again, you can see the benefits of having a robust video platform whether it's stand-alone Netflix or whether it's a complementary in Amazon. These guys know what they're doing. The entire space has just changed so quickly for the better.

Chris Hill owns shares of Amazon.com. Jason Moser has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.