Netflix gets thumbs up in stock market debut

By Michael Liedtke The Associated Press
Friday May 24, 2002

Online company’s shares skyrocket by almost 12 percent after initial IPO 


SAN FRANCISCO – Investors gave a thumbs up to Thursday’s stock market debut of online DVD rental service Netflix Inc., whose shares rose by nearly 12 percent after the company’s successful initial public offering. 

The shares closed at $16.75 on the Nasdaq Stock Market, up from the IPO price of $15. The stock traded as high as $17.40 Thursday. 

The positive response represented another baby step for Internet companies as the once-thriving sector tries to regain investor confidence following the dot-com meltdown of the past two years. 

After showing virtually no interest in online businesses last year, Wall Street has embraced both Internet businesses that dared to test the stormy waters this year. 

Online payment provider PayPal Inc. went public in February at $13 per share and enjoyed a 55 percent gain on its first day of trading. PayPal’s shares have climbed even higher since then, closing at $25.50 Thursday on the Nasdaq Stock Market. 

Although Netflix’s first-day pop wasn’t as dramatic as PayPal’s, the gains nevertheless were a heartening sign for the battered high-tech industry. 

“It looks like investors’ tolerance is growing a little bit,” said Kyle Huske, an analyst with IPO.com. “Any time you have a deal do well in any sector, it helps draw attention to the entire sector.” 

No one expects the success of the PayPal and Netflix IPOs to trigger a gold rush similar to the late 1990s, when hundreds of unprofitable Internet companies sold their stocks to the public. 

“There are still people out there who wake up screaming in the night when they hear the word ’dot com,’ ” said David Menlow, president of IPOfincancial.com. 

Still, the market is looking less hostile for the most prominent privately held Internet businesses. 

The changing sentiment encouraged online travel site Orbitz to file its IPO plans earlier this year, and the friendlier atmosphere is expected to eventually lure the popular search engine Google into the market. 

Both PayPal and Netflix enticed investors with their rapid growth and leadership in promising markets. 

Despite Netflix’s uninterrupted history of losses that totaled $141.8 million through March 31, investors are intrigued with the Los Gatos-based company’s prospects with households across the country embracing DVD players. 

Netflix has more than 600,000 subscribers, most of whom pay $19.95 per month to rent an unlimited number of DVDs from the company’s library of 11,500 titles. Subscribers are mailed up to three DVDs at a time after placing their orders online. 

“I felt like investors looked at our story for what it was,” Reed Hastings, Netflix’s chief executive officer and founder, said Thursday. “Being an online company didn’t taint us, nor did it give us a halo.” 

The dot-com tag forced Netflix to scrap its previous IPO plans two years ago. 

The delay gave Netflix more time to build a formidable business. When Netflix first filed plans to go public in April 2000, the company had just 120,000 subscribers and 5.4 million U.S. households had DVD players, about one-fifth of the estimated 25 million households with the set-top players at the end of 2001. 

The rapid adoption of DVDs still hasn’t been enough to make money for Netflix. 

In its most recent quarter, Netflix lost $4.5 million on revenue of $30.5 million in the first quarter, an improvement from a loss of $20.6 million on revenue of $17.1 million at the same point last year. 

Hastings declined to predict when Netflix will make money. Merrill Lynch, the investment banker that spearheaded the Netflix IPO, expects the company to become profitable in the second quarter of next year. 

Netflix raised $82.5 million from the IPO, and will keep $74.7 million after paying fees and other expenses incurred in the offering, according to documents filed Thursday with the Securities and Exchange Commission. The company will use $14.1 million to repay debts and then spend a substantial amount on promotions designed to attract even more subscribers through two-week free trials. 

If Netflix doesn’t become profitable “in a reasonable amount of time, investors will dump it pretty quickly,” Huske said.