Netflix Reports Good Earnings but Bad Guidance; Is it a Good Long Term Play?

Netflix NFLX reported third quarter earnings today afternoon, and the stock immediately dropped over 20%. While the earnings report was positive - EPS was $1.16 versus an estimate of $0.94 and revenues were $822 million versus an estimate of $810.5 million - guidance was low.

In fact, Netflix guided fourth quarter EPS to be between $0.36 and $0.70 while analysts expected $1.09. Netflix also reported that subscribers will grow slightly in the next quarter. Despite the mixed news, Wall Street punished the stock to the point that it broke below $100 to about $95.

Does this mean that Netflix is a good longer-term buy, or does it just mean that Netflix is on the last leg downwards?

Netflix has an excellent business model and offers a convenient, affordable service for millions of Americans. While competitive services like Redbox are starting to increase market share, Netflix still has a stronghold. Despite its popularity, Netflix's management made a few blunders in the past quarter which have severely hurt its share price.

First, management increased the price of its DVD delivery services by about 60%. While DVD delivery is the less popular option of Netflix subscribers, the move angered many customers, who depended on Netflix to maintain cheap prices.

Netflix also considered dividing the mail-in service and the streaming service. Although the idea was not necessarily terrible, Netflix chose a very unfortunate name: Qwikster. Someone on Twitter already had the Qwikster handle, and was a self-proclaimed pothead. He attempted to make millions by selling the name to Netflix, but in the end, did not receive any money.

Netflix has a ways to go to in terms of regaining trust in its customers, but it is definitely possible. Netflix is reportedly considering adding video games to its repertoire. Furthermore, it has managed to lock in deals, including one with the TV Channel CW, regardless of the negative press. Netflix will have to figure out ways to preserve cash flows and market share as well.

Netflix has lost over 33% of its market capitalization in 2011.