Netflix reported an excellent quarter after the close yesterday (Monday October 23, 2006) and the shares are popping today – up $4.12 to $27.35 with 8.7 million shares trading hands, according to Money Central (1:48pm EST, quotes 15 min delayed).
If you recall, we initiated our position in Netflix three months ago: “Did Netflix Deserve to Lose $345 Million in Market Value Today?” The answer was no. Today, Wall Street has changed its mind and reversed course – the value of the company is up about $300 million.
Netflix reported an excellent quarter, with free cash flow exceeding $26 million, but I think the real difference is just the market environment. Back then stocks were down and everybody was worried. Three months later they’re on a tear and everybody is bullish. So they sell a pretty good quarter then and they buy an excellent quarter now.
What did the quarter look like? Revenues of $256 million were up 48% from a year ago on 57.6% subscriber growth to 5.662 million. Operating cash was up more than 230% to $79 million. Free cash flow was up more than 350% to $26.5 million.
Netflix is now up almost 50% since our initial recommendation. However, with this excellent quarter I still think the shares trade at a discount to their fair value. Like I said, they are trading at around $27 while I think they are worth $37. So let’s hold.