It took three months for Netflix (NFLX) to go from hero to zero.
The DVD-shipper and movie-streamer announced a price increase in July 2011. Then negotiations with Starz broke down, with both sides walking away from the table. To top it off, CEO Reed Hastings slipped the announcement of separating the DVD business (now called Qwikster) from the streaming business (Netflix) into an apology.
So what did Netflix end up with at the end of the day? Angry customers, confused investors, and a stock price 60% lower than its peak.
I Feel a Pulse!
Mark Twain famously said “The reports of my death are greatly exaggerated.” The same can be said for Netflix.
The company will indeed survive and thrive following this tumultuous run. And, while it is true that the best time to buy shares of great companies is after they stumble, in this case you’d be better off waiting just a little longer.
Not Time to Buy… Yet
The long-term view is that Netflix is making all of the right moves. The streaming business is its future and needs to be tended to carefully. Qwikster can survive on its own.
Right now, the executive team has eaten a pretty big piece of humble pie. But don’t think they’re crying in their beer. They will find the right way to smooth customers’ ruffled feathers while at the same time pushing Netflix and Qwikster to new heights. Management knows the key to success is taking care of customers and shareholders. They will get the ship back on course.
However, in the short term, the stock is likely to feel more pain.
CFO David Wells spoke at an investor conference last week, where he acknowledged that the fallout from Netflix’s string of strategic moves was still playing out and that there have been “more cancels through the quarter.”
Customers didn’t like the price increase, and investors have been selling first and asking questions later.
If the number of customer cancellations is more than expected for longer than expected, that’s a problem. The market doesn’t like missed expectations.
Analysts have been slow to cut their earnings estimates and price targets following the recent news. Take a look at this chart:
Source: Capital IQ, a division of Standard Poor’s.
The dust hasn’t settled yet and expectations could be ratcheted down again — soon.
Competitors Are Circling
Sensing weakness, the competition is taking the opportunity to pounce on Netflix while it’s down. The pack has surrounded the current leader, looking for any opportunity to advance up the pecking order.
Dish Network (DISH) announced that its Blockbuster Movie Pass will start on Oct. 1. Amazon.com (AMZN) is giving away free streaming with a Prime membership, has just revealed its Kindle Fire tablet, and is adding content to its library. And let’s not forget that Hulu is on the block, waiting for the highest bidder.
Still, Netflix has the strongest distribution platform for digital media. Content providers cannot ignore it. The company is firmly entrenched between the studios and Netflix’s members. Case in point, Starz may have walked away (for now), but Dreamworks (DWA) recognized the power of Netflix and just cut a “game-changing deal” to stream its content in the future. Netflix’s brand may be a bit banged up today, but those scratches will buff right out.
When Will the Last of the Clouds Roll Through?
It’s been a rough summer for the alpha dog of digital media distribution. Netflix has the brand and the smarts to fend off the challengers in the long term, but the short term could turn ugly again.
The company will report earnings at the end of October. That may be the day to pick up shares at a fantastic price.
David Meier is associate advisor for the Motley Fool’s Million Dollar Portfolio newsletter. He does not own shares in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of DreamWorks Animation SKG, Netflix, and Amazon.com; and creating a bear put spread position in Netflix.
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