Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Netflix Down After Q3 Subscriber Guidance Cut; Management Out of Touch

By

Unfortunately, Netflix set itself up for the mess it's now in when it demonstrated a surprisingly nonchalant attitude toward the impact of plan price hikes.

PrintPRINT
It now appears that Netflix's (NFLX) recent plan price changes will be more than a small bump in the road for the world's leading movie-delivery service.

This morning, management cut its third-quarter subscriber guidance, showing particular weakness in the United States.

Netflix now expects the company to end the third quarter with 21.8 million subscribers versus a prior outlook of 22 million. In the U.S., Netflix now forecasts a subscriber count of 14.2 million, about 5% below guidance of 15 million.

You may be asking yourself, why is the stock down over $30 today? After all, the company's overall subscriber forecast is being reduced by just 1%.

Well, this is the nature of expensive momentum stocks. When the news gets bad -- even just a little bad -- earnings multiples compress in the blink of an eye.

Heading into the company's second-quarter earnings report back in July, Netflix was trading at 62 times expected full-year earnings. The quarter was good, but third-quarter guidance was lousy and the stock got wrecked.

By yesterday's close, that multiple had compressed to 45.

And as of the open today, it will be down around 35-40, depending upon how much analysts cut their earnings forecasts and how nastily the stock gets beaten down.

Where will it stop? No one knows.

Unfortunately, Netflix set itself up for this mess when it demonstrated a surprisingly nonchalant attitude toward the impact of those aforementioned price hikes.

I had this to say about Netflix on July 26, the day after it reported its second-quarter results:

...Netflix expects nothing less than business as usual in Q4, despite a serious disruption in momentum during Q3. That smells like overconfidence and a lack of humility to me.

As of 4:00 p.m. on Monday, Wall Street was looking for Netflix to generate just $923 million in revenue for Q4, according to Reuters.

So by bringing up this $1 billion number, Netflix blasted away a whole lot of valuable wiggle room.

It would be much better to ultimately report revenue at $900 or $925 million without having brought up this $1 billion number at all. One quarter from now, any Q4 guidance issued below $1 billion will be viewed as a guidance cut -- and another reason to dump the stock.

And what happened today? We discovered that Netflix actually underestimated the disruption in Q3.

Therefore, I am 1000% certain that Q4 will not be the pure bundle of joy management expected back in July.

Unfortunately, some of Wall Street's finest fell for Netflix management's happy-go-lucky vibes, leaving the Q4 consensus revenue forecast at $970 million as of yesterday afternoon.

That number's going to come down big-time, guaranteed, along with 2012 numbers.

However, we must not feel sorry for Netflix's management team. They've been selling the stock hand-over-fist all summer long.

As far as the stock goes, I last suggested that "Netflix is looking a lot more like a short than a long." Though the stock has come down quite a bit since I made that statement, I'm even more confident in this view because investors are set to lose all faith.

In addition, investors must be extremely wary of Amazon.com's (AMZN) Prime Instant Video service, which will reportedly be included free with its upcoming Kindle Tablet. Netflix's current pain is related to weakness in its DVD-only rental business. Amazon could easily put a dent in Netflix's streaming business, which remains strong. (See Amazon's Kindle Tablet: 6 Important Questions.)

I don't mean to sound smug, as I am taking a bit of a victory lap here. The reality is that I have made many incredibly stupid investing decisions and recommendations by keeping the faith in busted momentum stocks. In some cases, huge gains turned into huge losses.

As an aside, I have a question for all those following the UBS (UBS) rogue-trader scandal: What are the chances that these investment banks haven't profited from from winning rogue trades in the past? Will one of those those ever be reported?
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE