Netflix goes wild as earnings beat, subscribers soar

Stream into Netflix?
Stream into Netflix?

Shares of Netflix stock soared as much as 20 percent after hours on Monday as international subscriber growth blew away guidance and the company posted a better-than-expected outlook.

Netflix reported quarterly earnings that easily topped analysts' expectations on Monday, as quarterly sales passed $2 billion for the first time thanks to original series like "Stranger Things" and "Narcos."

The entertainment technology company posted third-quarter earnings per share of 12 cents — compared to 7 cents a share in the year-earlier period — on revenue of $2.29 billion. Analysts polled by Thomson Reuters expect the company to report third-quarter earnings of 6 cents per share on revenue of $2.28 billion.

"We are now in the fourth year of our original content strategy and are pleased with our progress," the company said in a letter to shareholders. "In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year."

Reed Hastings, Netflix
Tobias Hase | AFP | Getty Images

The company said it gained 370,000 net memberships in the U.S. and 3.2 million internationally, a total of 3.57 million, handily beating the 2.3 million the company forecast.

The company said in July it expected to add 300,000 subscribers in the U.S. and 2 million subscribers internationally in the third quarter. Analysts polled by StreetAccount expected 309,000 U.S. streaming subscribers and 2.01 million international streaming subscribers.

"They're adding fewer subscribers this year than they did last year. ... You know, that's why I think you've got to be careful with this stock," Barton Crockett, senior research analyst at FBR Capital Markets, told CNBC's "Closing Bell" on Monday. "Yeah, it's a great business, yeah they've had a great trajectory, but it's slowing. And a growth stock like this that isn't making much money, you know, is a volatile beast and can be a dangerous company when it's starting to slow and transition from a growth story to something more mature."

Looking toward the fourth quarter, Netflix expects to add 5.2 million net memberships: 1.45 million in the U.S. and 3.75 million internationally. That's above the 1.27 million U.S. streaming additions and 3.32 million international streaming additions expected by FactSet consensus estimates for the fourth quarter.

For financial guidance, Netflix expects earnings of 13 cents per share, above 7 cents expected by FactSet consensus estimates.

Shares of Netflix's stock have fallen nearly 13 percent so far this year, as the company's outlook for adding new users has struggled to keep up with Wall Street's expectations. In the second quarter, it added 1.7 million subscribers, below its own expectations of 2.5 million.

But Netflix has successfully added more original content, and has worked to add many local-language offerings abroad, dealing with disparate income levels, piracy regulations and broadband connectivity.

Series like "Stranger Things," both produced and owned by Netflix, represent the content that will distinguish Netflix, thanks to appeal in multiple demographics, the company said. The company has been quite successful in finding audiences for diverse content, including subtitled and dubbed content, seeing international titles in Mexico and France take off elsewhere, chief content officer Ted Sarandos said.

Upcoming American-British television series "The Crown," is another boundary-defying show that "is some of the most impressive television I've ever seen," Hastings said.

The ownership model also provides Netflix with "more attractive economics and greater business and creative control," the letter said. Still, that can add costs, Tru Optik CEO Andre Swanston told CNBC's "Squawk Box" before the earnings were released on Monday. Netflix said Monday it will expand its content budget to about $6 billion in 2017.

Sarandos said that original content comes without the studio mark-up and gives Netflix more flexibility with the rights to its content. While that requires more cash up front, Sarandos said the trade-off is worth it for more efficient, higher quality content. Plus, chief financial officer David Wells noted that the company does not have another big international launch planned, which should eventually reduce losses.

And this year, the company has "un-grandfathered," evening out prices for longtime users who were temporarily "grandfathered" in with cheaper prices. The company has now un-grandfathered 75 percent of members who will be un-grandfathered this year, the company said on Monday, and Hastings said he doesn't expect any more price increases in the near future outside Brazil.

On top of that, it has faced competition from live sports coverage of the Olympics and streaming services such as Amazon, Hulu, Sony Pictures, Sling TV, Crackle and Mindshare. Amazon said in July it would double its video content spend in the second half of this year, and triple its spending on original content.

"We face immense competition for consumer screen time," the letter said. "We presume that Amazon Prime Video will become as global as YouTube and Netflix this fall with the launch of the Jeremy Clarkson show. Our challenge is to continue to improve our service and content so that we better meet consumer desires."

Netflix also updated shareholders on its progress in China, where it now plans to license content to existing online service providers in China rather than operate its own service in China in the near term.

A strict regulatory environment has hampered content providers in the Asian nation. Disney's Chinese streaming service, launched in conjunction with Alibaba, was closed down, as was Apple's movie offering, the company noted last quarter.

While there's pressure for the company to internationalize faster, Wells said that they want to make sure they have an eye towards quality as well.

"There have been some rough blog posts on localization and subtitles in some markets and we pay attention to those," Wells said.

Netflix also expects unscripted content to grow over the next few years. Sarandos said that with the data that Netflix has, it hopes to elevate the genre.

While individual quarters may be volatile, Hastings told investors they expect to keep investing in content for quite some time.

"It's tremendous fun inventing the future," Hastings said.