Netflix is Twitching But Not Dead Yet?
Henry Blodget writes that only four months ago, Netflix was the toast of Wall Street, with traders everywhere shrieking with glee. Mid-July saw NFLX hit a high of $300 per share. Now, those same shares are trading at $75 each, and the same analysts who could not get enough of Netflix in July are now dancing on its grave, before it is actually dead.
Blodget points out that Reed Hastings has been down before and has bounced back like an inflatable toy. He also says that, contrary to current popular opinion, Hastings is no idiot. So the question is, will Netflix be back?
Unsurprisingly, the analysts are concerned. Morgan Keegan said today that, “Netflix is in the tough spot of regaining consumer trust, which makes us skeptical that December will show "strongly positive" net adds. Coupled with rising costs, we need to see evidence, not a hypothesis, of stabilization before getting constructive.”
Wedbush at least focussed on a possible solution. “Given much of the recent upheaval in its domestic subs base and changing perceptions of the company in the US, we expect Netflix to focus heavily on international expansion. Given management's penchant for using content and marketing spending as profitability levers in the past, we would not be surprised if some international spending is accelerated into certain quarters or delayed until periods after 1H:12, making accurately predicting 2012 performance very difficult.”
Sterne Agee went straight to the point. “Driven by significant international start-up costs and a slowing domestic business, Netflix now expects to lose money for at least the first half of next year (and likely for the full year).”
Citi took a positive slant. “Why not sell? Given that NFLX will now carry a 200X+ P/E on '12 estimates and still faces consumer backlash uncertainty, why not a Sell? Because NFLX still has a dominant position in the hyper-growth Streaming Video segment.”
Goldman Sachs was partidularly critical of NFLX management. “We are disappointed that management is sticking with the “if [we] build it, [they] will come” stance, assuming that consumers will soon forget about the price increase.”
So opinions are divided, and the Netflix's grave is not quite filled with dirt just yet. One would imagine that they have to act fast though, if they are to retain any hope of clambering back to the top again.
Traders who believe that Netflix is in the middle of a temporary blip but will recover strong might want to consider the following trades:
- Reed Hastings does not mind taking risks and suffering some short-term pain for the long-term good. Do not count him out.
Traders who believe that Netflix is simply delaying it's inevitable death may consider alternate positions:
- Customers have lost faith in the company and management seems to be utterly confused about how to move forward.
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