Why Netflix's Stock Tanked

News Analysis
Why Netflix's Stock Tanked
By Swanni

Washington, D.C. (April 25, 2012) -- Netflix on Monday released its first quarter report and the numbers were better than what most analysts predicted. The online rental service added 1.7 million streaming subs in the U.S. (3 million overall, counting international subs) and its $0.08 loss per share on revenue of $870 million topped the analyst estimate of a $0.27 net loss on sales of $869 million.

Then why did Netflix's stock fall 14 percent yesterday? Didn't the company exceed expectations, which normally would trigger an increase in shares?

Normally, yes. But Netflix was (is) the victim of a growing consensus that the company's future subscription growth is on shaky ground. While Netflix added 1.7 million streamers in the U.S. in the first quarter, many analysts (including yours truly) have warned in recent weeks that the streaming category is about to get very crowded. Heavyweights such as Intel, Amazon, Apple, Comcast, DIRECTV, Verizon and Redbox are all reportedly ready to launch their own streaming services (or have already done so.).

With so many players warming up on the sidelines, it's getting increasingly hard to envision a scenario in which Netflix routinely adds 1.7 million streaming subs every quarter. In fact, it's getting easier to see a day soon when Netflix announces that it didn't add any streaming subs in a particular quarter. The company instead might be happy to declare that it held on to the subs it has.

In its first quarter report, Netflix did little to discourage such negative forecasting. The company warned that its second quarter sub growth could slow. Plus, it said that DVD subs in the first quarter fell again, dropping 1.08 million.

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Netflix CEO Reed Hastings tried to paint a pretty picture on the numbers, saying that the company remains on target for future growth. But it appears that many Wall Street analysts (and investors) didn't buy it because they concluded weeks ago that Netflix is in trouble. The second quarter sub warning only confirmed their suspicions, which led to the stock tanking on Tuesday.

Netflix's stock this week has now dropped 18 percent (it fell four percent on Monday prior to the release of the first quarter report). It may rebound somewhat this week with some traders looking for bargains. But the once alarmist forecast by Wedbush analyst Michael Pachter that Netflix's stock will fall to $45 in the next year is now looking more than possible.

With Netflix trading over $100 at the beginning of the week, $45 would represent more than a 50 percent drop.

What do you think? Offer your comments below!

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Phillip Swann is president and publisher of TVPredictions.com. He has been quoted in dozens of publications and broadcast outlets, including CNN, Fox News, Inside Edition, The New York Times, The Washington Post, The Chicago Tribune, The Financial Times, The Associated Press and The Hollywood Reporter. He can be reached at swann@tvpredictions.com or at 703-505-3064.

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