Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17
Q4 Pivot View for Stocks and Gold - 14th Oct 17
Gold Mining Stocks Q3’17 Preview - 14th Oct 17
U.S. Mint Gold Coin Sales and VIX Point To Increased Market Volatility and Higher Gold - 14th Oct 17
Yuan and Gold - 14th Oct 17
Tips for Avoiding a Debt Meltdown - 14th Oct 17
Bitcoin Hits New All-Time High Above $5,000 As Lagarde Concedes Defeat and Jamie Demon Shuts Up - 13th Oct 17
Golden Age for GOLD, Dark Age for the Stock Market - 13th Oct 17
The Struggle for Bolivia Is About to Begin - 13th Oct 17
3 Reasons to Take Your Invoicing Process Mobile - 13th Oct 17
What Happens When Amey Fells All of a Streets Trees (Sheffield Tree Fellings) - Video - 13th Oct 17
Stock Market Charts Show Smart Money And Dumb Money Are Moving In Opposite Directions—Here’s Why - 12th Oct 17
Your Pension Is a Lie: There’s $210 Trillion of Liabilities Our Government Can’t Fulfill - 12th Oct 17
Two Highly Recommended Books from Bob Prechter - 12th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Netflix Share Price Crash on Loss of Subscribers

Companies / Tech Stocks Oct 26, 2011 - 06:38 AM GMT

By: EconMatters

Companies

Best Financial Markets Analysis ArticleShares of Netflix (NFLX) plummeted almost 35% to $77.37 in one day on Tue. Oct. 25 after reporting losing 800,000 U.S. subscribers in the third quarter, and predicting an unprofitable 2012 mostly due to its aggressive international expansion plan.  The magnitude of the share price drop caught option traders off guard even though the options market had priced in a 15% swing in either direction.


The company has been on a downward spiral unable to contain subscriber revolt in the past 3 months triggered by its customer infuriating 60% prices increase and splitting its DVD rental into a separate company called Kwikster.  The end result?  Hell has no fury like a Netflix customer scorned.....en masse.

Chart Source: WSJ.com, Oct. 25, 2011

The abrupt cancellation of the Kwikster spinoff on Oct. 10 turned out to be too little too late.  The company has lost $11 billion in market cap, and is now worth only 25% of what it was on July 13 when the stock was flying high at $298.73.  The chart below shows a reversal of fortune between the year-to-date stock performance of Netflix and Netflix competitor - Amazon (AMZN).  (Amazon's shares are also under pressure mostly due to its digital price war with Apple, but we don't see Amazon drop 75% in three months either.)

Chart Source: Yahoo Finance, Oct. 25, 2011

Netflix's abandonment issue is not just limited subscribers and investors.  According to Businessweek, at least five analysts downgraded Netflix on Tuesday, "citing lost management credibility and a dwindling subscriber base amid strong competition."  (EconMatters already downgraded Netflix as early as Nov. 2010, and again in January 2011, and October 2011)

This is a classic case of strategy execution blunders which could be detrimental to a company that has no differentiable products like Apple (AAPL) and Samsung, albeit with a mediocre business model, and has to rely on service quality and reputation.

Another sign of the over-confidence of Netflix management: The company, reportedly has been spending its cash on repurchasing shares at extreme values above $200, instead of preserving capital for rainy days.   Now the massive loss of subscribers has put Netflix cashflow under pressure, and may have become a source of concerns with at least one Netflix content partner as WSJ reported that

"DreamWorks Animation SKG CEO Jeffrey Katzenberg said in an interview Tuesday that he is "unequivocally" confident that Netflix will continue being able to keep paying for movies and television shows at its current rates."  It is not a good sign when a business partner has to tell reporters that he is confident about your ability to pay (so that his company stocks (DWA) won't get dragged down as well).  DreamWorks Animation recently struck an exclusive deal with Netflix worth about $30 million a picture replacing DreamWorks current deal with HBO, which expires in 2013. .

With its reputation and creditability threshed in just three months, there could already be conversations at the board of directors level regarding Reed Hastings staying on as the CEO, as Busienssweek reported,

"....Reed Hastings, responding to questions, said he has no plans to step down and declined to comment on discussions with Netflix directors."  

Its U.S. subscriber base was the ace in the hole for Netflix in getting deals from movie studios and to finance its international expansion. Now Businessweek quoted  Netflix projecting to add only up to 52,000 domestic streaming customers over the holiday period, while losing as many as 3.63 million high-margin DVD subscribers,

So ironically, Netflix may need to do some heavy marketing to earn back riled subscribers, which may involve hefty price cuts and incentives.  In any case, most indicators point to a suffering of near term profitability, and a long and lonely road back to the past glory.

For now, it seems most of the market bulls have leaned the lesson on Netlfix as WSJ notes,

".... Weekly put options to sell [Netflix] shares for prices like $70 also were active. Roughly 172,000 Netflix put options traded, versus roughly 177,000 calls."

Disclosure: No Positions

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife