Netflix Inc. (NASDAQ: NFLX) came as close as it could to breaking even in its most recently reported quarter, with net income of $67 million against revenue of $2.4 billion. It is part of a string of tiny profits that goes back a year.

The Netflix numbers look very similar to those Amazon.com Inc. (NASDAQ: AMZN) posted for years, and the company may only match Amazon’s history of modest income moving forward. It is too early to tell if Netflix eventually will start to produce the sort of strong bottom line Amazon did recently.

Netflix’s history of small net income is based on a gamble by founder and CEO Reed Hastings, which is based on the same sort of bet by Jeff Bezos. From the standpoint of stock price, the formula has worked. Netflix has a market cap of $70 billion, against a revenue run rate of $10 million. Amazon’s is just shy of $400 billion, against a revenue run rate of about $100 billion. In each case, the premium is staggering.

Bezos made several decisions to advance his business beyond that of an e-commerce superstore. He moved into hardware with the Kindle, generally believed to be a loss leader. It did, however, spark a revolution in e-books, on which it presumably made huge sums and in which it is the leader today. Bezos moved into the personal computer industry, and the result is the Fire tablet. He also took Amazon into the smartphone business, which was a colossal failure.

More recently he has pioneered the Prime membership program, which has a large streaming media component that competes with Netflix. His latest inventions, Alexa and Echo, have had a big effect on language-powered households.

Hastings has decided to make the sort of risky moves Bezos did, and continues to do. At 89 million members, Netflix has grown from 82 million a year ago. Without original programming and massive marketing costs, the growth rate would be impossible. Hastings has to hope that he will advance his subscriber base so far that revenue will offset these costs enough to drive net income margins from almost nothing to a level that future investors can tolerate. At a 10% margin, that would be $1 billion a year, proof that the business model finally works. Just like Amazon’s does today.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.