Internet stocks fared well in the third quarter, and the fourth-quarter is poised to be strong for the three major players.
Netflix's stock has gained more than 14% since it reported third-quarter earnings on Wednesday, reaching an all-time high of $174.94. But is this rally warranted?
While the movie rental site missed earnings expectations, reporting a profit of $38 million, or 70 cents a share, one cent shy of estimates, its subscriber growth continue to bests forecasts and investors are more focused on the growth of its streaming service.
During the quarter, Netflix gained 1.9 million new customers, a 90% surge from a little over 1 million new users in the second quarter. This marked the fourth consecutive quarter of more than 1 million new subscribers. The boost in users was driven by the launch of the Canadian streaming service in September, as well as new distribution platforms like Apple's iPad and TV, as well as Internet-enabled televisions and Blu-ray players.
The company also upped its forecast for subscriber growth, and is now expecting between 19 million and 19.7 million subscribers by the end of the year, compared with a prior guidance of 17.7 million to 18.5 million.
Netflix is openly moving from a DVD-by-mail company to a streaming company, as the number of users who streamed content for more than 15 minutes was 66%, up from 41% in the third quarter of 2009 and 61% in the second quarter of this year.
"By every measure we are now a streaming company, which also offers DVD-by-mail," CEO Reed Hastings said in a statement.
Netflix also plans to expand internationally starting in the second-half of 2011.
On the downside, content costs are rising. In the third-quarter content costs were higher due to an up-front payment to EPIX, which drove gross margins down to 37.8% from 39.4% in the second quarter.
The biggest concern for Netflix is how much longer it can continue to grow at the current pace, with several analysts predicting expansion could slow by as early as next year.
"In our view, the current valuation does not reflect the ongoing challenges in acquiring additional streaming content, nor the increasingly competitive landscape, as well-funded competitors (Google, Hulu, Apple) ramp up offerings," Susquehanna Financial analyst Marianne Wolk, wrote in a note.
EBay's big story in the third quarter was its PayPal service.
The Internet retailer reported a 23% surge in profit to $432 million, or 33 cents a share, compared with $350 million, or 27 cents, in the year-ago period.
Excluding one-time items, eBay actually earned 40 cents a share, three cents more than Wall Street's forecast. eBay originally said it expected earnings in the range of 35 cents to 37 cents per share.
Revenue reached $2.25 billion, also ahead of estimates of $2.18 billion. PayPal reported a 22% surge in revenue to $838 million.