Why the Netflix share price surged 14% after the market closed

Jon Smith runs over why the Netflix share price has rocketed higher and explains why he’s optimistic about the direction of travel from here.

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It has been a busy 24 hours for Netflix (NASDAQ:NFLX) shareholders, with the release of the latest set of quarterly results. The earnings were released after the US market closed for the day (21 January). The Netflix share price has rocketed higher in post-market trading. Based on the results, I can see some clear reasons why.

The share price movement

Some might be a little confused about how the stock price could move when the market is officially closed. The reason for this is that it’s possible to buy and sell stocks even when the stock exchange is closed. The exchange does allow it, but the transactions are booked off-exchange and mainly bought and sold by experienced institutional clients, such as hedge funds. It’s not something the vast majority of retail investors can do. Yet it does provide us with a good indication of how the stock could trade when the market does reopen.

For Netflix, the results saw the share price shoot higher, up over 14% ahead of the market open. Should the price manage to hold around this level when it does open, it would mark a fresh all-time high for the US stock.

Details of the results

The business managed to add a record 19m subscribers during the final quarter of the year. This was in part thanks to the content slate, ranging from NFL games and the Jake Paul vs Mike Tyson boxing match to the much anticipated Squid Game 2. The bump in added subscribers means that it surpassed 300m for the year, a 15% increase. This was more than analysts were expecting, which is one reason for the size of the stock price jump.

As well as beating revenue and profit forecasts, the outlook going forward provided another reason for investor optimism. Management raised the revenue forecast for this year by $500m. Advertising revenue is expected to double in the coming year, having already doubled over the past year. If the company can deliver on this, the growth of the firm could warrant a higher share price.

What could happen next

The stock is already up 79% over the last year, ignoring the move overnight. Despite the good news from the results and the outlook, there are risks ahead that are worth mentioning. For example, some are concerned that subscription numbers could start to tail off, especially if Netflix can’t continue to provide the content quality seen last quarter. Netflix will stop reporting subscriber numbers going forward, so it’ll become harder to gauge this part of the business.

Another risk is the hyper-competitive industry that it operates in. There’s certainly no room to get complacent!

Despite these concerns, I’m very impressed with the results. Based on the upbeat view for the coming year, I’m strongly thinking about adding the stock to my portfolio shortly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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