Netflix's spectacular flameout

The stock has erased all of its 2012 gains. Here are 4 reasons.

By Kim Peterson May 24, 2012 1:48PM
Credit: © Paul Sakuma/AP
Caption: The exterior of Netflix headquarters is seen in Los Gatos, CalifShares of Netflix (NFLX) were down again Thursday, continuing a long slide that has frustrated its investors over the past two months.

Netflix has erased all of the gains made this year after a series of wild momentum swings. After topping $129 in February, the stock was trading at $70.82 at midday.

What happened to Netflix?

We may be seeing death by a thousand cuts here. There wasn't a single factor, but several smaller events seem to be making investors wary.

Here are four problems hitting Netflix this year:

Disappearing kids' shows? Viacom (VIA) once thought it was a great idea to allow "SpongeBob SquarePants" and other Nickelodeon shows to stream on Netflix. It has added millions to Viacom's annual revenue, after all.

But all those kids' shows on Netflix may be hurting Viacom's ratings. A recent study by Sanford Bernstein found that TV ratings for Viacom and Disney (DIS) suffered in homes with Netflix streaming.

That makes sense. Why would parents hunt around on cable for kids shows when they can pull up a wide array of choices from Netflix? Many Netflix subscribers complain about the lack of selection of movies, but the children's programming is great.

The kids' shift to Netflix is so great, in fact, that Sanford analyst Todd Juenger speculated that Viacom and Disney will "pull their premium kids' programming from Netflix ASAP." That would be a major blow to Netflix, which has already lost a number of significant content offerings in the last year.

Disappointment in Latin America. Netflix has launched in 43 countries in Latin America and the Caribbean -- a huge initiative that carried some risk. Now, the company is finding that growth in the area hasn't taken off like it did in Canada and parts of Europe.

One problem, according to a company executive, is that people in Latin America aren't as open to the idea of watching programs online, reports The Los Angeles Times.

"Latin America is growing. We're not losing to a competitor," said chief financial officer David Wells at a recent investor conference. "It's just not growing as quickly as we expected when we entered the market."

High programming costs. Licensing programs for Netflix's streaming library costs money. A lot of money. Sometimes, the cost is just too high and Netflix has to dump content. That's what led the company to end its relationship with premium cable network Starz Entertainment last year.

Now, Netflix is planning to spend $3.7 billion on content over the next five years, The Daily Beast reports. Some of that will go to developing the company's own original series. Some will go to licensing programs to fill its massive streaming library. As Netflix's audience has grown, so has the price tag for it to find content. And that's a huge risk for the company going forward.

Doubts about subscriber loyalty. Netflix has a goal of adding 7 million streaming subscribers this year, but analysts aren't buying it. Netflix only added 1.7 million subscribers in the first quarter and was estimating a gain of 800,000 in the second quarter. With that slow growth, is a 7 million gain for the year realistic?

So are there any reasons to buy Netflix right now? A bullish company watcher might view the stock's low price as a buying opportunity.

InvestorPlace recently offered three reasons to buy Netflix. First, the company has 26 million customers and is an entertainment destination. Second, Netflix has immense global potential as it continues to expand into new countries. And finally, the stock's recent plunge has made its valuation more attractive, with a price-to-earnings ratio of 24. But that ratio is still higher than the 21 for the Standard & Poor's 500 Index ($INX).

What do you think? Can Netflix shares recover?

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35Comments
May 24, 2012 6:47PM
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Let's boil it down to simplicity. Net Flix got greedy and forgot about the people who made them...the customer. This is what happens to companies who follow this path.
May 24, 2012 2:47PM
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No advertisements (commericals) is priceless. I am buying stock and will be a loyal Netflix suscriber, until they add commericals.
May 24, 2012 5:12PM
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I still haven't forgotten how they hosed their loyal customers not too long ago.  Screw Netflix.
May 24, 2012 6:40PM
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I'm with you Shane.  Not the way to treat customers, doubling fees for the same service.
May 24, 2012 5:50PM
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For $8 a month I think it is a great entertainment option but then I do not need the latest and greatest.  Just started the service in January when my wife and I finally upgraded to a large screen TV.  Beats HBO and Cinamax hands down since HBO never seems to have any thing new on it except for it's weird shows and Cinamax is nothing but softporn after about 9 oclock. 
May 24, 2012 5:49PM
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The biggest problem with the online distribution are the big media companies, not Netflix
May 24, 2012 11:32PM
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Every article that bashes netflix can only site Starz for content they lost. They offered Starz 300 million for their content, and Starz said no. 300 million Starz never got from anyone else. Who were the greedy ones there?

Netflix streaming is still the best out there as far as content. They have the best library...period. People who say their library sucks...compared to whose? Streaming will never be up to date. Studios want to protect their content for DVD sales as much as possible. The trouble is that studios haven't realized yet that streaming is their best bet against piracy and illegal downloads. If a person can stream a movie from netflix anytime they want, why would someone bother downloading it?

I like hulu too for recent shows, but both hulu's and amazon's library pales in comparison to netflix's.

May 24, 2012 6:05PM
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When the USPS stops 1 or 2 day delivery and no saturdays, Netfix will be hurt again, as those who like their dvd service will be losers again and may drop or cut back their service.
May 24, 2012 11:40PM
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netflix did this all by them self they only have them to blame they made people mad when they spit the dvd and streaming content the only way to save face is to return to the way they was and offer a discount i think people would go back
May 24, 2012 6:48PM
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Streaming content still sucks.  Good for kids shows, OK for kids movies, acceptable for adult shows, but DISMAL for adult movies, unless you are the guy from MST3000 who is stuck inside a spaceship with some robots and no other form of entertainment except "B" and "C" movies.
May 24, 2012 5:56PM
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Need to get better movies and a lot quicker than they currentluy do
May 24, 2012 6:18PM
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Been a loyal customer for over 5 years,  we have the streaming plus 3 dvds plan, for 23 bucks a month and got rid of basic cable which we only used to watch the local news anyways so we ended up saving 32 bucks. 55 bucks for basic cable on 1 tv per month just wasn't worth it.
May 24, 2012 9:43PM
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I dumped them when they charged for streaming I was already paying $20.00 a month for blue ray and never watching it. They would do better to give free stream with a dvd order. The idiot who decided to raise prices in a depression should have been caned. He lost a lot of customers who will never come back. Myself included.
May 25, 2012 2:22AM
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I had Netflix for both DVD delivery as well as for streaming. When they shafted us all by jacking up the price to double, I felt I had to make some kind of statement so I cancelled the DVD portion of my Netflix account but kept the streaming option only because I stream to my Wii and I just purchased a Roku device and didn't want to lose that money. I now get my DVD's delivered by Blockbuster. Blockbuster actually has some titles that I couldn't get delivered from Netflix. I'm about to add Hulu to our viewing options, too.
May 24, 2012 10:38PM
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I have Netflix for both DVDs and streaming.  I get any new movies I want to see by DVD, and I like streaming for older movies and TV shows.  That said, I'm still pretty disappointed in the streaming offerings.  Netflix lost a lot of great things when Starz left, and after an initial influx of new content, I haven't seen anything of significance added in quite some time.  

The article states that part of their money is going to go towards original content.  I personally wish Netflix would spend that money on getting more content that people are actually asking for. I'm not even asking for new shows or movies- heck, even some older classics would be nice.  Or try to make sure that the TV shows they do have are up-to-date.  I can understand not having the current season of a show on there, but last year's or even the year before last?  These are episodes that are already showing in syndication in some cases- why doesn't Netflix have access to those? 
May 24, 2012 8:21PM
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I am getting rid of Netflix in June 2012 because of the lack of blockbuster movies.
May 24, 2012 6:12PM
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I am an "Old School" type person who after Blockbuster disappeared from our area and then so did Hollywood, I jumped onto Netflix for receiving my DVD's by mail.  Now, on my 9th Movie List of Rentals, once completed I will officially be in the current year of 2012 and Netflix has been very convenient in helping me catch up.  Because somewhere in 2009 when Hollywood disappeared and my wife said to me " I don't want to be nailed down for the weekend", as far as to have to watch movies or get a late fee, we got behind in our movie watching.  In the little over 2 years that I have been renting from Netflix, after the 9th List is complete, we will have watched 185 movies not counting one that will be released in June and another one yet to have a release date, which will make it 187.  Out of those 187, my wife has watched 177-180.  So overall for me and reluctantly my wife, we have had a excellent experience with Netflix and we are not part of the streaming family yet, only if they stop the ones by mail, will I jump onto to that service.
May 24, 2012 10:04PM
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Raising the price was probably necessary but not that much. What they should've done, was to test the waters by raising 2 to 3 dollars and go from there. I cancelled when they raised the price but probably would have kept it for a while if they had just raised a couple of bucks.
May 24, 2012 5:41PM
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"...43 countries in Latin America?" Sounds like something of a generous estimate!

May 25, 2012 1:50AM
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Its too late for netflix.  They have an inferior library and they dont have the $$$ to upgrade.  Amazon prime, redbox and hulu are the future.
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