Where Does Netflix Go From Here?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A 30% drop in share price over a month's time - let alone almost 15% in a day - is always going to leave a mark. However for those who caught earlier articles, the precipitous drop should not have been surprising. Netflix (NASDAQ: NFLX) was primed to come back down to earth for a host of reasons. As painful as it may be, the stock is just now trading at what are finally (somewhat) reasonable valuations.
But this isn’t about an “I told you so.” In fact, some of the steep decline after the company recently announced Q1 earnings seems a bit overzealous, if not downright weird compared to investor's past love affair of all things Netflix. It must be said management in general - and CEO Reed Hastings in particular - certainly haven’t done much to help the current situation. But before we dive into that, here are a few particulars from Q1:
Compared to expectations Netflix outperformed for the quarter by a relatively large margin. Most analysts were assuming a loss of $0.17 a share for the quarter, but Netflix – in large part because of better than expected DVD revenues (they didn’t decline quite as fast as management thought) – reported a net loss of just $0.08 a share. Not stellar of course, but considerably better than The Street had assumed.
And here’s where things get a bit…odd. The company had issued guidance earlier this year they were assuming a net loss for Q1 much worse than the reality – to the tune of $0.16 to $0.49 a share. And yet the stock gets absolutely battered. Why? There are a couple of reasons actually.
First, what kind of guidance is that anyway? A spread like that – if one were a pessimist – would indicate a management team that can’t be counted on to provide anything remotely considered as accurate forecasting. Which in turn calls into question just how well they know their own business. Here’s another example - guidance for Q2 2012 is for earnings to fall somewhere between a loss of as much as $0.10 a share, to a profit of $0.14. What?
Another reason the stock was beaten to a pulp is because that's simply the way the market works. A company (just ask Nokia) announces they don’t expect upcoming earnings for – pick a quarter, any quarter – to meet expectations and the stock gets hit. Then when earnings are actually announced, the stock gets hit again. It's the ultimate double whammy.
Unfortunately all the same concerns remain for Netflix – not much has changed there. Competition from Google’s (NASDAQ: GOOG) expanding YouTube offerings, Verizon’s (NYSE: VZ) recent partnership with Coinstar (NASDAQ: CSTR), Comcast announcing they want to play and let’s not forget Amazon’s (NASDAQ: AMZN) Prime continuing to grow their video content. In fact Amazon was specifically mentioned - along with Comcast – in Mr. Hasting’s recently released Letter to Shareholders as companies Netflix is "...keeping an eye on."
Another concern remains the near to mid-term expenses associated with the company’s aggressive expansion plans, content and technology expenditures. It’s nice Netflix continues to add net streaming subscribers, but with increased marketing and other expenses combined with the significantly lower margin online business, it’s going to take time for the sheer volume of users to overcome that disconnect.
The expanding partnership with Facebook, continued international expansion and net customer growth give shareholders something to hold onto for the long term. But for investors of the mind Netflix is a bargain at these “depressed” levels, you’d be wise to think again.
timbrugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.