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Why Netflix, Inc. Is Soaring Today

Image source: Netflix.

What happened

Shares of Netflix (NASDAQ: NFLX) jumped as much as 20% higher on Tuesday morning, trading on very heavy volume. The digital-video veteran published its third-quarter results on Monday night, exceeding analyst estimates and management's own guidance on several key metrics.

So what

In the third quarter, Netflix had expected to add about 300,000 new domestic subscribers and 2 million international accounts. Instead, the company got 370,000 new subscribers in the domestic market and 3.2 million additions abroad. As a result, GAAP earnings of $0.07 per share overshot both the Street view and management's $0.05 guidance figure.

Explaining the subscriber surprise, CEO Reed Hastings gave credit to the growing portfolio of original content. Hit shows like Stranger Things and The Get Down helped Netflix reduce its customer churn.

Now what

Importantly, the outperformance ran in the face of critics who expected much fewer additions or even outright defections during this quarter. The bearish theory rested on price increases scaring off the most cost-sensitive Netflix subscribers.

Sure, the quarterly subscriber additions were smaller than the year-ago figures. But the third quarter of 2015 was still soaking up large numbers of international customers from the long-awaited launch of Australian services, and the 2016 period had to compete against the Summer Olympics.

What we saw here was some fresh evidence of Netflix's pricing power and subscriber loyalty. After sidelining those worries, the stock has recovered from the punishing plunges in January and July, and is now trading at roughly breakeven in 2016. And in 2017, the bottom line is still expected to turn sharply upward.

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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days.

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