That's what the Street is trying to figure out after the company this morning revised its Q3 subscriber guidance. While Netflix didn't change its financial forecast, it reduced expectations for subscriber growth, a vivid demonstration of just how angry the company made some customers with the shift in pricing. Meanwhile, the Street has other concerns. For one thing, there are worries that the acquisition of Hulu by a deep-pocketed buyer - Google, say - could create a much more formidable competitor in the streaming video sector. And there are also worries that the arrival of an Amazon tablet - expected later this year - could make the online retailer's nascent video streaming offering into a more serious threat. On the other hand, some analysts note that the drop in subscribers is not that surprising, and that we might be seeing an acceleration of the shift from DVD rentals to streaming, which is something Netflix seems to be encouraging.
So what to do with the stock now?
Here's what of the Street analysts think, starting with the bulls (who seem to be outnumbered at the moment):
- Michael Olson, Piper Jaffray: He keeps his Overweight rating, but cuts his target to $305, from $330. "We continue to believe Netflix raised prices on its DVD plans in order to push the sub base further toward streaming," he writes. "With today's updated guidance, it appears that this is happening. While the DVD/streaming puts and takes have been slightly different than the company expected, the drop in DVD subs was expected and somewhat intended. That said, the company needs to see an offsetting uptick in streaming subs and that has not yet happened."
- Nat Schindler, Bank of America/Merrill Lynch: He keeps his Buy rating. "This is NFLX’s first downward revision in subs, clearly not a positive sign, but given this drop, we believe much of the volatility caused by the recent pricing
change is already priced in," he writes. "We continue to believe the company and the stock will be driven in the long-term by total streaming subs which we believe could more than double in the U.S. over the next few years. As streaming subs increase, NFLX should have more margin room to buy fixed price content and further differentiate itself from potential competitors." - Jamie Townsend, Town Hall Research: He keeps his Buy rating. "We continue to believe that separating the DVD and streaming customer base is a sound long term move," he writes. "We appreciate the short term impact that this move is having on churn and subscriber growth as a small portion of the customer reacts negatively to what for them is a price increase. However, in our view the impact does not fundamentally change the positioning of Netflix as the best investment in the still early stages of a worldwide streaming video explosion. While the DVD business was a critical aspect of Netflix’s early business model, the company needs to move away from the lower margin mailing business in order to better position itself to reap the fullest benefits of the expansion of its streaming model in the U.S. and increasingly around the world. We believe that the Latin American expansion remains on track and that expansion into Europe will occur in early 2012. We do not the ignore potential for competitors entering this market but also believe that the company has well positioned itself to expand into newer markets ahead of others."
And now some of the bears:
- Youssef Squali, Jefferies: "While Netflix's leadership in online streaming should remain uncontested for a long time, we believe that a combination of the recent price hike, a less favorable competitive environment, and aggressive international expansion raises the risk profile of the stock," he writes, repeating his Neutral rating. He adds that the next shoe to drop could be the completion of the auction for Hulu; he thinks Google could be the buyer, a scenario he thinks spells trouble for Netflix.
- Tony Wible, Janney Capital: He keeps his Sell rating. "We believe it will be increasingly more difficult to support its high valuation in the face of headwinds tied to Usage Based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and SAC [subscriber acquisition costs]," he writes.
- Scott Devitt, Morgan Stanley: Maintains an Equal Weight rating. "We think investors have time to assess the situation and we do not recommend blindly buying into today’s lower share price," he writes. Devitt thinks the next risks will be competitor consolidation and the debut of the Amazon tablet.
- George Askew, Stifel Nicolaus: Hold rating. "We believe we are seeing temporary churn related to the pricing change, but not a long-term crack in the business model," he writes. "The company’s facts show the company’s subscriber mix is shifting even more rapidly to the streaming service. This trend should be positive for the company’s franchise and margins as spending on postage and fulfillment can more quickly be shifted to streaming content purchases. The real message here is that the DVD is even more dead than we thought; short the post office, but support your local postal worker."
- Ryan Hunter, Wedge Partners: He thinks the weak guidance has less to do with the price increase and instead reflects organic slowing of subscriber growth. "We have maintained for some time that NFLX’s growth expectations should be similar to those of pay channels like HBO, Showtime, Cinemax, etc. Once those services reached the subscriber levels that NFLX is approaching, their growth rates have leveled off."
- Charlie Wolf, Needham: "We continue with an Underperform rating on the expectation that competition in the streaming content market will eventually intensify."
- Barton Crockett, Lazard Capital: "We see streaming competition ramping up over time," he writes. "The Hulu sale could prove a catalyst, especially if reports that there may be an aggressive buyer for the property, plus expanded video
rights, pan out. A Hulu buyer could potentially lock up exclusive TV rights from Hulu partners – Disney, NBC, Fox – that restrict Netflix’s ability to renew its 1- year duration TV deals with these studios. Netflix’s appeal to consumers may also be affected by the end of February 2012 loss of Starz content, and the recent loss of Sony movies from the Starz deal."
NFLX is down $33.75, or 16.2%, to $174.96. I would note that that with today's decline, the stock is now off $129.83, or 42.6%, since hitting an intra-day high of $304.79 on July 13. The company has a relatively modest market cap of $9.2 billion; compare that with, say, the $19 billion market cap for Yahoo. If the stock keeps sliding, at some point you might start hearing takeover speculation resurface...and don't be surprised if the focus as usual turns to Microsoft, where Netflix CEO Reed Hastings is a member of the board.
