There's nothing more tempting than a suddenly fallen stock-market darling. But we'd fast-forward away from the shares of video-rental giant Netflix.
The Los Gatos, Calif., company's common (ticker: NFLX) plummeted 35% last Tuesday after it disclosed losing 800,000 subscribers during the third quarter, in the wake of unhappiness with a 60% price increase last summer. The stock has fallen to 84 from its July 13 peak of 298.73. More subscriber defections are expected.
The bungled price hike, part of a now-canceled rebranding of its original DVD rental business, isn't the only problem. Netflix executives concede that they're facing rising costs for streaming-video content, increased competition, a tough launch for international services, and eroding margins. The company said it now expects losses "for a few quarters" in 2012.
Before the report, the consensus among Wall Street analysts had been $6.20 in GAAP (generally accepted accounting principles) earnings per share for 2012. That's now fallen to $1.65, which means NFLX is trading at 50.1 times next year's net, which is ridiculously high compared with tech stalwarts like Dell (DELL), at 8 times forward earnings, Hewlett-Packard (HPQ), at 6, and Microsoft (MSFT), at 9 times.
Similarly, the stock's consensus target price has dropped from 275 in July 2011 to a current 88, although some analysts believe the price could drop as low 51 (Janney Capital Markets), 60 (Susquehanna), 67 (Goldman Sachs) and 70 (Atlantic Equities) over the next 12 months.
"Netflix's recent reversals are less about tactical missteps, and more about copyright," says Nicholas Rodelli, a senior analyst at accounting and legal-research firm CFRA, which is based in Rockville, Md., and provides research for institutional clients. "Unlike DVDs, which are protected by copyright's first-sale doctrine, content owners hold all the cards" in streaming. Prior Street assumptions of "margin expansion as far as the eye could see were never realistic," says Rodelli.
This reality should come as no surprise to Barron's readers. Toward the end of last year, we warned ("Time to Hit the Eject Button?", Dec. 27, 2010) that Netflix faced ever-higher costs of content for its streaming service, weakening gross margins, uncertain prospects for international growth and increasing competition that could fragment the $40 billion video-rental market. That didn't stop the stock from rising from to 235, from 185 at the time. Another skeptical article ("A Short Departs, but Worries Stay in the Picture," Feb. 21) preceded that climb.
So if you submit to the buy urge, don't say you weren't warned.
I own a lawn service business, when i raise my prices i loss 10% of my business the frist year but made it up the next year and then some. My business was seasonal so this is short term problem for netflix. Get the cheap people out so next time when you raise prices most of the people will stay. There always turn over.
This piece of sell side hacking ignores two significant facts:
1. The losses are paper losses based on accounting given their expected investment in growth. There was a time when we rewarded growth investments. Their implication is business drops off so bad that gains become losses...which of course is ridiculous.
2. Lastly the statement of expected continued loss of subs, shows no close affinity to the situation. The protest move of subs is already reversing itself as many have attested to on this board.
Barons is a paid for shill and not a source of news. It would appear that even after all that volume at the bottom, some big kahunas still haven't covered their positions.
Here's why they won't be effective: 1. There isn't much retail investors in here left to spook (%80 of the Float on the 35% day exchanged hands. Aka New Ownership). 2. The bulk of the new institutional holders, know what they bought and are not as easily shaken. 3. We are in resistance free territory until roughly $110. My guess is we had such a blowout bottom that most "would be resistance" holders at $110 levels, panic'd out already. So even $110 level may not hold back the growing momentum by smart money.
As I mentioned in a previous post, between the technicals and the piggy shorts, this will continue to rise, until we actually see less articles like Barrons.
All these sell side analyst backed articles and all these scary posts on yahoo, only serve to fuel the flames because they need kindling that does not exist anymore. I will start to worry when I see just the opposite...
Here's your real sell signal: "Barrons says NETFLIX is to media, what GOOGLE is to SEARCH", and just raised its price target to $450. Many analyst agree with 9 out of 10 rating NFLX a Strong Buy"!