Market Overview

Is Netflix Going Back to $300 Anytime Soon?

Netflix (NASDAQ: NFLX) is a company that has a love-hate-love relationship with its share price and investors. From being a sub $20 stock five years ago to $300 last year, followed by a crash to the $60s and double that now, one thing is for sure - this is a wild ride.

Should investors expect to see share prices rocket back to $300 highs anytime soon? My opinion is a resounding no and here's why:

Bad Management Decisions
Behind a smart and well-performing company is a wise and discerning management team. The controlling oversight of a company knows what their consumers and investors want - and they deliver it. How has Netflix held up in this regard? To find out, we first go to their customers.

Netflix feels that the future of movie watching is in the realm of online streaming content. Their current business model in the U.S. bundles DVDs by mail and online movie viewing as one package. Why not separate the two sources thereby lowering the cost to the consumer that only wants one or the other? They tried this last year but it failed miserably. Why? The real goal was to sneak in a combined price hike to the tune of 60% - a move that was later rescinded, but not before 800,000 subscribers walked away feeling cheated.

Also, there is the constant complaint of B-movies and sub-standard content. Perhaps if consumers welcomed the proposed division of Netflix and Qwikster with the associated price hike, there would be more money for fresh high-quality content. The problem now is that Netflix promotes themselves by offering unlimited cheap online movie viewing. But to improve the catalog, there is the challenge of either charging more or having fewer high-end titles - neither of which is well received.

Wasting Investor Cash
Did they work hard to improve investor equity? Let’s take a look at another wrong move in 2011.

During 2011, Netflix repurchased nearly 900,000 shares at an average price of roughly $220, which works out to nearly $200 million. Then, they turned around and raised $200 million by selling 2.86 million shares at $70 a piece.

So let me get this straight: They buy one share for $220 and less than a year later, they sell it back for $70? The loss of $150 on 900,000 shares works out to a $135 million mistake on those shares alone. In addition to putting this cash in the paper shredder, there is also another two million shares diluting the pool at a price of $70 a piece. With share prices now 75% higher than the recent share offering, could they have timed it any worse?

Looking Ahead
Still, it's all about future growth right? On that note, things are not looking too good either. There is constant competition popping up from companies such as Amazon and BBC, and we haven’t even discussed how Apple is oiling the gears for iTV to crush the market.

And have you noticed that cable companies now offer virtually all their TV shows and some movies online for free? Sure, you need to suffer through the odd commercial, but you get all the current primetime shows one day after the TV premiere without the cable bill. Sites like Crackle allow you to watch older movies at no charge and content quality compares to Netflix. If Netflix loses on both content and price - what is the upside for expansion?

If Netflix wants to stay relevant, they need to end online viewing subscriptions altogether and rely on advertising - in my opinion. If people are really watching streaming movies as much as Netflix says they are, wouldn't it make more sense to rake in money on advertisements while having a feature that removes the ads for non-interrupted viewing  at the rate of $0.50 or $1 per movie? While I can't say for sure, my personal view is that the price point of the Netflix share is still far too high for the quality of the offering.

Kurtis Hemmerling is an active stock trader and he frequently shares his analysis and insights on Money Crashers, a personal finance blog that covers investing topics and reviews of stock brokers like Scottrade.

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