Why Netflix Woes are Far from Being Over

By Halina Zakowicz - April 25, 2012 | Tickers: AMZN, CSTR, NFLX, VZ, WMT | 0 Comments

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Netflix (NASDAQ: NFLX) shares have taken quite a tumble this week, thanks in part to the company's recent earnings loss report of $0.08 per share. However, things could arguably have been a lot worse for the DVD and Internet streaming services company; analysts had predicted a loss of $0.27 for this past quarter. Furthermore, Netflix Inc. still posted its total quarterly revenue to be $870 million, on par with the predicted $868 million and up over 20% when compared to the same quarter a year ago. New Netflix subscribers for the first quarter of 2012 were posted at 1.7 million. Looking forward, the company predicted a return to positive cash flow in the second quarter and a new streaming video subscriber number of 7 million for all of 2012.

In light of such news, why have Netflix shareholders as well as brokers been so pessimistic about the company? Compared to just two days ago, Netflix shares have lost over 15% of their value. Furthermore, this stock's decline may still be in a state of free-fall.

Investors have good reason to be leery when it comes to Netflix stock, yet this hesitation has little to do with the company's recent earnings report. Here are three good reasons why it may not be a good time to buy Netflix' depressed stock shares:

Increased competition

Amazon (NASDAQ: AMZN) provides streaming video through its $79/year subscription plan Amazon Prime. Wal-Mart (NYSE: WMT) offers over 20,000 different titles via its video-streaming service Vudu. Verizon (NYSE: VZ) and Coinstar (NASDAQ: CSTR) have joined forces to expand on Coinstar's Redbox DVD kiosks via video streaming and DVDs by mail. Comcast (NASDAQ: CMCSA) also recently announced that it would be offering Internet video streaming to its existing subscribers via Streampix. This service would run $4.99 per month for regular Comcast subscribers or be free for those with more expensive service bundles. Other competitors in the video streaming business include Hulu Plus, Blockbuster on Demand and Best Buy CinemaNow.

As a result of this influx of competitors, analysts are skeptical about Netflix's prediction that it will add 7 million new subscribers by the end of 2012. Anthony DiClemente of Barclays noted that "...increased competition and a lack of tailwinds from videogame-console proliferation and video-store closures layer in additional risk to [Netflix'] 7 million target."

Offering less for more

Back in 2010, Netflix witnessed unprecedented growth in its subscriber base because it offered DVDs by mail and video streaming for only $7.99 a month. Then, Reed Hastings, the company CEO, announced that Netflix had decided to split up its services and charge subscribers an additional fee for using both the DVD provider Qwikster and streaming content. As a result, subscribers bailed and the company stock price plummeted over 25% in a few short weeks. Hastings quickly retracted his announcement of the split but the damage was already done. Furthermore, Netflix never reversed its decision to hike prices by as much as 60% for half of its customer base; this price hike is largely why Netflix has been progressively tumbling from its $300/share high over the last 9 months.

So, what now?

Can Netflix turn itself around? The company was once viewed as a Rule Breaker, going against the herd mentality and not being afraid to try new business models. Here is what Netflix can do to regain its former top position amongst DVD and Internet streaming service companies:

Beg, borrow and steal streaming content at all costs

Arguably, Netflix has the largest content library to date, an advantage that allows it to maintain its close to 30 million subscriber base. The key to adding those additional 5.3 million subscribers by the end of 2012 is to focus on streaming content acquisition at all costs. Being a Netflix subscriber myself as well as an investor over the last three years, I've noticed how the company has become lax in its efforts to add new streaming content for movies and TV shows. This will hurt Netflix over the long-term, especially now that would-be subscribers have a plethora of choices when it comes to selecting streaming content providers.

A management team that can better predict the numbers

Netflix management predicted a $0.27 per share loss for the first quarter of 2012 that ended up being a $0.08 per share loss. While this development was significantly better for the company's bottom line, it also begs the question of whether management really knows what is going on at company headquarters. How could estimates be that far off? Whether this was a tactic to stem a larger stock price drop, we'll never know. However, such a large discrepancy does make investors wonder about the competence of Netflix' senior officers.

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