The Netflix chain saw massacre

The stock continues to tumble as investors ponder the outlook for the world's largest video subscription service.

By The Fiscal Times Apr 25, 2012 11:31AM

Image: Watching television (© Frare/Davis Photography/Brand X/Corbis)By Suzanne McGeeThe Fiscal Times

Not all earnings surprises are created equal.

Better-than-expected earnings reports have been contributing to stock price gains for much of the last two weeks. And then there's Netflix (NFLX), which on Monday reported a much narrower loss than Wall Street analysts had forecast, in spite of first-quarter revenue -- $870 million -- that was right in line with what investors had been told to expect.

 

As soon as the results hit the wire, however, traders and investors scrambled to dump their holdings in the online media company as if it had suddenly become toxic.

Within minutes, Netflix's stock plunged 14% in after-hours trading to around $88 a share, and it continued its descent Wednesday, where late morning it was around $82.

Why wouldn't investors want to celebrate Netflix's "beat"? After all, the company has also made progress in getting its customers to download content onto a host of mobile devices, from tablets to iPhones. And its international expansion -- into Canada, Mexico and the U.K., among other destinations, is going well.

But those successes simply aren't enough to offset the company's first quarterly loss in seven years -- not with questions about the company's future subscriber growth and profits getting louder quarter by quarter.

When it launched, in the days of the first dotcom boom, DVD players were still new; the business of mail-order rental DVDs was one of those "killer apps" developed in the first wave of Internet innovation. But then came Web 2.0, and an entirely new landscape. Suddenly, it wasn't about getting physical DVDs into the hands of consumers, but about convincing them to fork over a monthly subscription to stream content onto a range of digital devices.

Not only had the delivery mechanism for content changed, but so had the competitive landscape. Providers ranging from behemoths like Amazon (AMZN) to upstarts like Hulu.com all began offering similar content; Netflix was no longer dominant.

True, the company is adapting. At the end of the first quarter, it had 23.41 million subscribers paying a flat fee to download content from the "cloud," up from 21.67 million at the end of the fourth quarter of 2011. But some analysts had hoped subscriber growth would be more robust; that Netflix would show more clearly that it is no longer as dependent as before on snail-mail home delivery of DVDs to drive profit margins.

Netflix still seems to be struggling to recover from its misstep of last year, when it briefly planned to separate and spin off the physical DVD rental business, forcing customers to set up two separate accounts and pay two separate subscription fees. Before the plan was announced, Netflix's stock traded as high as $304 a share; its fall from grace since then has been rapid. When consumers rebelled and began seeking out alternatives, Netflix quickly retreated and went back to business as usual. But, CEO Reed Hastings admitted, the company is only six months into a three-year process of rebuilding trust and its reputation with actual and potential customers.

Staying in business and staying competitive isn't going to be cheap. These days, Netflix has to battle for access to movies and shows -- and sometimes it loses, as has happened with offerings from Sony (SNE) and Walt Disney (DIS). And it will need to continue expanding to meet consumer interest in streaming video in new markets, or risk losing those potential customers to rivals. That expansion won't come cheap, either.

In the broader context, delivering a narrower-than-expected loss for a single three-month period is an underwhelming achievement. More important than today's profits are signs that consumers -- increasingly insatiable consumers of streamed content -- are willing to sign up in droves for Netflix's services. But Netflix no longer is a "must have" for cinephiles and TV junkies; it no longer has the reputation of being hyper-innovative, but rather of responding to technological change that it didn't anticipate and that it can't control.

When even the pros -- the analysts on Wall Street who have been tracking this stock since its birth in the early days of the Internet -- can't figure out how it will manage to generate both growth in subscribers and higher profits, then it's time to moderate expectations not just for the company's earnings potential but also its share price. And that is just what happened in the aftermath of the earnings announcement, as investors looked past the immediate good news and into the future -- and decided that they didn't like what they saw.

Expect to see similar patterns take shape at other companies that have been market darlings of late, from yoga gear retailer Lululemon Athletica (LULU) to online retailer Amazon. Both command premium valuations; both face questions about how sustainable outsize earnings-growth rates have become.

In the wake of the stock market's impressive gains over the last six or seven months, investors are hyper-aware that all it will take to trim 10% or 20% off the value of a stock is a shift in psychology. So they'll be extra vigilant, and prepare to pull the trigger ahead of the rest of the market. In that kind of environment it makes sense to at least dig deeply looking for any vulnerability, decide ahead of time whether a favorite high-flyer would still look appealing priced 20% below current levels -- and if the answer is no, maybe it's time to head for the exits before the panicky stampede begins.

More from The Fiscal Times

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.


71Comments
Apr 25, 2012 9:09PM
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Well I am staying with Netflix. I can afford to go to Time Warner, Dish, or Direct TV, but why would I?

The price is 7.99 a month and since I pay for the internet anyway I think I'll stay with Netflix, in fact I might add Hulu plus to get the current in production TV shows. I  also subcribe to Amazon prime for my college books and other reasons, so I get their video on demand as well.

The cheapest and not the best pay TV service I can find is Dish, which is 34.95 a month, so Netfix at $8, Hulu at $8, and Amazon at about $7 a month is $23 dollars a month 35 - 23 is 12, so I guess I know which is cheaper. The Dish service at  the $35 dollar level stinks too...

I look at it this way, since I use the internet for work and college and Amazon Prime for my school books why not save some money too.

Apr 25, 2012 4:25PM
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Netflix did this to themselves.  You reap what you sow.
Apr 25, 2012 11:28PM
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NETFLIX is still the best buy for your money. I will stick with it.
Apr 25, 2012 10:40PM
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I agree with Ken45. My Direct TV was over twice the cost of cable.  I gave up cable three years ago for Netflic, Amazon, Lulu plus, Roku box and over the air (30 channels) All of this is still cheaper than cable!  I save the extras and get myself something nice for my birthday every year.
Apr 26, 2012 10:58AM
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Netflix should just add PORN to boost their stocks, especially for the Xbox Live App.
Apr 26, 2012 7:52AM
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I'll stay with Netflix.  I like that they have a lot of older movies and TV shows that I either haven't seen or want to watch again.  The only problem is that our post office is going away and that will make it harder to get DVDs in a timely manner.  I don't go to Netflix for new releases; that's what Redbox is for.  The streaming content problem isn't them, it's all the greedy backward content providers and studios that do NOT get that content delivery has changed.  They don't want anyone watching their stuff online.  They want everyone (in this economy?!) to shell out $30 for a stupid Blu-ray.  Someone needs to hit them with a clue-by-four.

Apr 25, 2012 10:16PM
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I have been using Netflix for 12 years now, ever since I have had a DVD player. I don't use the DVD service anymore, though, just the streaming. It is annoying that not everything is available to stream; however, it's $8 a month. After too much time spent looking for something to watch and nothing on, I dropped cable. I live in a rural area and we only have one cable provider (Cable One, horribly expensive). 
I can always find something in my online queue to watch. I use Netflix to watch some movies and older television shows and Hulu Plus to watch television from this season. I feel that I get my money's worth and am glad to have options besides satellite and cable.
Sure, Netflix is troubled financially. It's not as innovative and amazing as it used to be. One would think, though, that cable providers are doing even worse between declining subscribers and advertising revenue. Where's THAT story, MSN?
Apr 26, 2012 9:10AM
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Netflix is still a viable business. what they lost however is what Apple has....brand loyalty and fans. Apple gets away with charging what they do and a product release cycle that is an investors wet dream bc people "like" them. iFans even evangelize for them. Netflix's missteps rightfully or not showed they didn't care about their fans and got rid of these people. Now Netflix competes on a feature basis with  other companies. A competition they don't seem to be winning as well or if all.
Apr 26, 2012 7:15AM
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Netflix DVD service is GREAT.  Their library is over 70,000 titles and you can watch 4 to 6 movies
or tv series per month (depending on mail location) for $8.  Streaming is a bonus.  For those who do not want cable, you don't need cable for the dvd service.

How can some people say this is over-priced??  Yes, you have to wait awhile for new releases to be available, but no big deal, since there is so much to watch. 
I really like the access to the many foreign flix, especially the British movies and TV shows.
Where else are these available??

Go Netflix!!
Apr 25, 2012 1:17PM
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<opening comments about how much Netflix stinks, with reference to old price hikes>

<personal anecdote bellyaching about long wait time for some DVD by mail, or lack of "good" streaming content>

<triumphant proclamation of canceling Netflix service>

<closing remarks with wish that Netflix goes out of business soon / burns in h***>

Did I miss anything? Open-mouthed
Apr 25, 2012 9:44PM
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Netflix is perfect for what I need it for. Old movies. I cannot get the selection anywhere else. And really, it isn't that much.
Apr 26, 2012 7:45AM
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Hands down Netflix is the bomb.....I travel around a lot and get stuck almost everywhere. when I have an internet connection, I can watch my favorite shows or a movie. My wife still rents movies and still returns them late. Her late fees are more than my $8 subscription. I have  been a member for 4 years and plan to be a member for the foreseeable future. Considering the competition why would I change!
Apr 26, 2012 4:44PM
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Not sure what everybody is hating on Netflix for. What are your other options? Blockbuster (more expensive), Hulu (better for TV only), Amazon, iTunes, OnDemand (all more expensive if frequent renter), Redbox has a minimal selection and oh yeah, you have to drive there and back every time you want a movie!. Not sure how that is convenient. (especially if the movie you want is rented out). The price isn't as cheap for the Redbox either when you figure in your time and gas money if the kiosk isn't on the way home. Roku is not great either. Crackle, really? Crackle still has commercials and anything worth watching on Roku requires a paid subscription. We have all become so whiny about not getting what we want immediately. You really can't find anything to watch until new releases come out? Stop crying about the price hike as well. Netflix was way cheap to begin with and everybody out there that is worth anything will eventually raise their prices. We will not be happy until we cry are way into a monopoly of crappy expensive services. Oh wait, that is cable!
Apr 25, 2012 1:17PM
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What is up with MSN's fascination with Netflix?
Apr 25, 2012 6:13PM
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Remember when $$$flix was taking money in hand over fist? That was before 8/2011 when they said it's not enough let's screw our loyal customers that have been with us for years and double the price! As a ex-user I love it when the whole thing falls apart because of greed!Great decision Net flix!
Apr 26, 2012 8:59AM
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Netflix almost put Blockbuster out of business (or at least made it irrelevant) because it was the future of movie viewing.  Get DVD's in the mail the next day, stream movies and shows to your TV or computer right now.  But now the industry itself isn't keeping up with the industry. Netflix is making itself irrelevant by having a largely uninspiring collection on its online streaming service.  People want good prices AND good selection. Whoever stands up to the plate for that is poised to knock Netflix out just like happened to Blockbuster.
Apr 26, 2012 1:32AM
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Netflix is still the best bang for the buck. Most of those who bash it really have little to bitch about and are the sorts of people who would cut off their nose to spite their face.

Apr 25, 2012 8:46PM
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Netflix is an innovative company that offers films that you never would have been able to find "on demand" or in the brick & mortar movie rental stores of old.  Their streaming services are fantastic not only for film, but for television shows and documentaries as well.  Aside from sports, everything I have ever watched or wanted to watch is available through the online streaming services for only $7.99 a month.  Try getting that price through cable, phone companies, or satellite... Oh wait, that's why we keep seeing so many articles attempting to discredit and bury Netflix.  Overly wealthy CEOs from organizations such as Comcast & TimeWarner own the media and are likely paying writers to protect their overpriced products so they can keep their billion dollar salaries.   

Netflix = TV & Movies... forget all the rest. 

Apr 26, 2012 11:41AM
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The only ones winning in this are the folks who license their content They keep charging more and more for their content, and, as a result, consumers keep paying more and more to have cable TV, etc. I still prefer buying CDs and Blu Rays as I can watch them without the Internet. In reality , streaming is the worst thing that has happened to consumers. It's like renting a house instead of buying; you pay and pay but have no equity. At least if I want to sell my DVDs, I can probably get a buck or two apiece for them.
Apr 26, 2012 9:20AM
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Snail Mail? I get the DVDS in a one day turnaround because the hubs are located strategically in every state. Another mis-informed journalist...Besides all titles are available on Blu Ray and DVD where only a few newer titles are available to stream. If I have to pick a service I go DVD because I want the latest and greatest not season 3 of "Who

s the Boss?" circa 1987

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