From Hero to Zero: Netflix (NFLX) Investors Down 58% This Year

December 23, 2011 1:12 PM EST
A wrap on Netflix (Nasdaq: NFLX) for the year...

The company started off the year strong with shares trading around the $175 mark. As a first mover in the online video streaming industry, Netflix has been able to build a strong brand name recognizable and trusted, however the loyalty seemed to be missing.

Some analysts started to become skeptical of Netflix when competitors began stepping up. Investors said "no worries" and continued to buy the shares as Netflix accounted for 6 out of 10 movie downloads for the month of February. CNBC’s Jim Cramer was making statements in March that a company should try to acquire Netflix before Apple (Nasdaq: AAPL) does.

In April, the company posted solid first-quarter results with earnings of $1.11 per share, topping the Street’s expectation by $0.04. Sales also beat expectations, but the most notable thing was second-quarter guidance which called for $762-$778 million in domestic sales, 24-24.8 million domestic subscribers and earnings of $0.93-$1.15 per share.

Following the strong report, a parade of analysts started to believe Netflix’s position in the industry and market share was untouchable. While rating and price target raises were a dime a dozen right about this time, one analyst at Janney was bucking the trend. On April 26th, Janney noted future headwinds were too substantial for the company’s current valuation as shares were trading in the $250 range. The firm put a $170 price target and a Sell rating on the stock.

Throughout the month of May, shares remained volatile as talks over new contacts and existing contracts popped up and disappeared on a daily basis. In late May/early June, shares experienced a nice increase as rumors came out Facebook CEO Mark Zuckerberg was in talks with Netflix. The news had shares of Netflix on news reporter’s lists of stocks trading at 52-week highs throughout June. Shares popped over the $258 per share on June 23rd when it was announced that Netflix’s CEO, Reed Hastings, was appointed to Facebook’s board.

Going into July shares of Netflix experienced another rise as talks were confirmed the company would be offering its service in Latin America and the Caribbean. Piper Jaffray raised its price target on the company to $305 per share at the time. On July 11th, shares of Netflix rose strongly and jumped over the $300 per share barrier.

All the happy thoughts investors had on July 11th were about to get wiped out on July 12th when management first announced its new pricing structure. The company reported it would no longer be offering a plan with both streaming and unlimited DVD rentals. Many customers were extremely disappointed with the 60 percent price increase and many analysts didn’t know how to react. While most analyst firm’s noted the price structure would cut subscriber growth, they didn’t know if the price increase would be enough to offset it. Goldman Sachs analysts believed it would and an analyst at Oppenhiemer increased the firm's price target to $360 per share.

On July 25th, Netflix reported a second-quarter earnings beat (by $0.15 per share) and said it added 1.8 million subscribers over the quarter. Potentially the first signs of deterioration were seen, however, as the company's third-quarter earnings guidance of $0.72-$1.07 per share was below the Street’s estimate of $1.09.

Following the guidance, more and more bad news began to appear. Talks Google (Nasdaq: GOO) and Amazon (Nasdaq: AMZN) were bidding on Hulu and that Apple would soon be out with a video streaming service were heard. Shares took a step drop on September 1st when reports suggested Netflix ended its deal with Stars after not agreeing to charge its customers a premium for the service.

Some analysts remained positive on the stock in the beginning of September, but when management released revised third-quarter guidance, shares plummeted. Analysts started jumping off the band wagon. Investors began dealing with a slew of downgrades. Analysts at Goldman and Barclays remained positive. The stock was now around $130.

Almost directly following the new third-quarter guidance, shares of Netflix experienced a slight boost when Hastings announced plans to split the company into two. The plan was to spilt the company’s DVD rental business and streaming business. After investors and analysts talked over the idea and began revising models, shares began to selloff. Hastings announced on October 10th the company would longer be undergoing a split.

Bullish analysts started losing hope in the stock’s price and cut price targets dramatically, some by almost $100.

Going into the release of the company’s third-quarter results, there were many more active puts than calls -- and rightfully so. Netflix did beat downwardly-revised sales and earnings expectations for the quarter, but the company’s fourth-quarter guidance and a loss 800,000 subscribers pushed shares over 27 percent lower during the after-hours session on October 24th.

Citing the company’s new guidance, multiple firms cut ratings, estimates, and price targets. The S&P also cut its rating on the stock from BB+ to BB. Oppenheimer was one of the only firms who remained bullish on the shares.

The guidance still lingers in traders minds; with just four trading sessions left in 2011, Netflix shares are currently trading just over $73.

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Richard on 2011-12-23 13:39:48
Mark as Spam | Reply to this comment

Greed, it turns out, was not good

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