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Netflix: Fool Me Seven Times, Shame on Me


Netflix once again shows that it is underestimating just how bad business is.


Note: Michael Comeau took a short position in Netflix on the afternoon of 11/22, after this article was published.

Fool me once, shame on you.

Fool me seven times, shame on me.

If you've been following my extensive writing on Netfix (NFLX), then you may know that I've been keeping an ever-expanding timeline on the company. Up until yesterday, that list consisted of six very specific signs that Netflix was in big trouble:

1. July 12 -- $291.27 (closing price)
Netflix announces price increases of as much as 60% for customers that subscribe to both its DVD-by-mail and streaming services. Customers start getting cranky. But hey, it's gotta make money, right?

2. July 26 -- $266.91
The company reports a monster second quarter, but lousy Q3 guidance due to the price increases' impact on the subscriber count. Bizarrely, Netflix forecasts that it will hit $1 billion in revenue during Q4, a prediction that I considered to be completey ridiculous. Hope officially becomes a part of the Netflix case, as the company's overly bullish Q4 outlook sets Wall Street's expectations far too high.

3. September 15 -- $169.25
Netflix cuts its third-quarter subscriber guidance, making it clear that business was not bouncing back as expected -- another indication that the company was in the middle of a bad streak. This should have scared the living daylights out of anyone still bullish on the stock.

4. September 18 -- $155.19
Netflix announces plans to separate its DVD-by-mail service, which will be rebranded as "Qwikster." Every customer hates the fact that they will have to deal with two websites with separate billing.

5. October 10 -- $111.62
The company ditches the Qwikster idea amidst widespread criticism.

6. October 24 -- $118.84
Netflix reports better-than-expected third-quarter revenues and earnings, but a lower-than-expected subscriber count and absolutely atrocious fourth-quarter guidance. The stock drops 35% to $77.37

And now we come to today's addition to the list:

7. November 21 -- $74.47

Netflix announces that it is raising $400 million in equity and convertible debt. In the company's S-3 filing with the SEC, it revealed, not so shockingly to Minyanville readers, that business is still deteriorating.

I'll let Netflix do the talking (emphasis mine):

We expect that consolidated quarterly revenue will be relatively flat until we can achieve positive net subscriber additions. As a result of the relatively flat consolidated revenues and previously announced increased investment in our International segment, we expect to incur consolidated net losses for the year ending December 31, 2012. We cannot assure you that our domestic streaming cancellations will continue to decline or that gross new additions will remain strong. If we are unable to repair the damage to our brand and reverse negative subscriber growth, our business, results of operations, including cash flows, and financial condition will continue to be adversely affected.

Back on October 24, heading into Netflix's disastrous third-quarter earnings report, Wall Street's 2012 earnings consensus was $6.14 a share.

Yesterday afternoon, it was $1.11 a share.

Now that number goes somewhere below zero. And the 2012 revenue consensus of $3.66 billion, which implied growth of 15%, should also come down at least a few hundred million bucks.

And what else could go wrong?

Well, the company is raising a significant amount of cash, which implies that worries about content-acquisition costs are coming to fruition.

And what if, for Cyber Monday, Amazon (AMZN) offers some kind of insane deal for its Prime Instant Video Service?

Or maybe Apple (AAPL) announces a cut-price iPad with some kind of video-streaming subscription service next year?

How about Spotify and Pandora (P)? Is there really anything stopping them from expanding into video down the road?

And maybe, just maybe, Netflix is once again underestimating just how bad its business is suffering.

Because you know -- it has happened before. At least six times. Maybe seven times.

Get it?

Twitter: @MichaelComeau

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