Why Netflix, Inc. Stock Jumped 13% This Morning

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What happened

Shares of Netflix (NASDAQ: NFLX) soared to new all-time highs on Tuesday, following the release of strong fourth-quarter results. The stock opened 13.2% higher and settled down at a 10.8% gain just before noon EST.

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So what

In the fourth quarter, Netflix added 8.3 million net new subscribers while also raising prices. Top-line sales increased 33% year over year to $3.3 billion, nearly tripling GAAP earnings to $0.41 per share. The company issued 23 guidance targets for this period, exceeding 21 of these while matching the last two. For the global subscriber additions metric, the guidance target stopped at 6.3 million net new accounts.

The headline results -- revenue and earnings -- were broadly in line with analyst estimates but nobody expected subscriber additions of this magnitude, paving the way toward accelerating growth in upcoming quarters.

Now what

This quarter proved beyond a reasonable doubt that Netflix subscribers appreciate the entertainment value they're getting for their money. Critics thought that a 10% price increase in many territories, including the U.S., would trigger a spike in customer churn with disgruntled users signing off by the millions. Instead, the company scored record growth thanks to the loyalty-boosting effect of an ambitious content creation strategy.

On that note, Netflix burned through $2 billion of free cash in 2017 and plans to dive even deeper into the red cash-flow ink this year. The cash burn should land between $3 billion to $4 billion, financed by another dip or two in the readily available wells of low-interest debt papers.

This is the rocket fuel that powers Netflix's dramatic growth. As a longtime Netflix shareholder, I'm more than happy so see the company carve out an unmatched market share in the exploding field of digital entertainment. The cash profits will come later, enlarged by every loyal subscriber who signed on during this land grab.

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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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