SAN FRANCISCO -- Netflix's (NFLX) move to compete against traditional cable-TV channels with original programming is pulling in more subscribers to its Internet video service and winning back investors who doubted the company's ability to develop distinctive entertainment.

The skepticism dissipated Monday with the release of Los Gatos-based Netflix's financial results for the opening three months of the year.

The headquarters of Netflix is shown in Los Gatos, California September 20, 2011. REUTERS/Robert Galbraith
The headquarters of Netflix is shown in Los Gatos, California September 20, 2011. REUTERS/Robert Galbraith (© Robert Galbraith / Reuters)

The first-quarter numbers showed Netflix added 2 million U.S. subscribers from January through March -- hitting the top end of the target set by the company's management. The growth left Netflix with 29.2 million U.S. subscribers to an $8-a-month service that streams movie and TV shows to Internet-connected devices.

Those first-quarter gains, coupled with signs that Netflix's profit margins are widening, delighted investors. The company's stock soared $42.78, or 24.5 percent, to $217.15 after the results came out. If the stock rallies similarly Tuesday, it will mark the first time Netflix's stock has topped $200 in 19 months.


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Netflix's stock had plummeted to as low as $52.81 in a stunning downfall that began in July 2011 when the company outraged its U.S. subscribers with pricing adjustments. The change resulted in a price increase of as much as 60 percent for customers who wanted Internet video and a DVD-by-mail option that ensured they would receive the latest theatrical releases. Investors also fretted as Netflix's losses on an international expansion piled up and the company's bills to license video mounted.

Now it looks like Netflix CEO Reed Hastings -- an object of scorn when the company's stock was plunging -- might have known what he was doing all along. In the process, he appears to have regained the luster that made him a Wall Street darling while Netflix's stock was soaring toward its all-time high of nearly $305.

Netflix eked out a profit of $2.7 million, or 5 cents a share, in the first quarter. That contrasted with a loss of $4.6 million, or 8 cents a share, last year.

If not for the costs for refinancing some of Netflix's debt, the company said it would have earned 31 cents a share. That figure topped the average analyst estimate of 18 cents a share.

Revenue rose 18 percent from last year to $1.02 billion -- about $7 million above analyst forecasts

Hastings envisions Netflix becoming as popular as any channel on cable or broadcast TV. To realize that goal, he decided Netflix should become more like Time Warner's HBO channel and develop more series that can't be seen anywhere else.

Netflix took its first major leap in its new direction in early February with the debut of "House of Cards," a critically acclaimed series made exclusively for Netflix. The series, starring Academy Award-winning actor Kevin Spacey, reportedly cost Netflix $100 million, amplifying fears the company was spending more than it could afford.

Indeed, one of the few downsides to Netflix's report was that for the second quarter in a row, it posted negative operating cash flow, meaning it spent more cash on its business than it took in. That's a warning sign, said financial analyst Michael Pachter, who covers the company for Wedbush Securities. The company's profit for the current quarter reflects the benefit of new content such as "House of Cards" in boosting subscription revenue without recognizing their full costs, he said.

"Cash flow is a better proxy for the health of the company than its earnings, and the market is completely ignoring cash flow," said Pachter, a longtime Netflix pessimist.

Investors seem to have lost all sense on the company, he argued. With its after-hours boost, Netflix's stock is trading at about 165 times the company's expected earnings for this year and 76 times its expected earnings for 2014.

"The stock is irrational," Pachter said.

Netflix is becoming so popular that too many people using the same account are trying to watch video at the same time. The company currently allows no more than two devices to watch at the same time. Netflix said Monday that is introducing a $12-a-month plan that will allow up to four devices using the same account to watch video.

Another original series, "Hemlock Grove," came out Friday on Netflix. Although the horror series didn't get great reviews from TV critics, Netflix said Monday that the viewership of "Hemlock Grove" in its first weekend surpassed the numbers posted by "House of Cards."

Another Netflix exclusive, the resurrection of "Arrested Development," is scheduled for next month.

Staff writer Troy Wolverton contributed to this report.