Has the Netflix ($NFLX) reaction gone too far?

In July, I cautioned readers that Netflix [stckqut]nflx[/stckqut] may be at risk. By the end of the article, I suggested that you should be cautious but NFLX management would have a plan to maintain revenues and earn investor’s confidence. At the time, the stock was well above $250 and now it is well below $100 as I write this article. Hopefully in the time between these two articles you were watching the market indicators and you ended your ownership of the company. At this time on this site, I don’t offer specific instructions on when to buy, sell, or hold – I just suggest companies that are worthwhile for you to consider or not to consider.

But what if you didn’t sell in August and September as the stock was falling like a skier going down a black diamond ski trail only to watch that skier go over a cliff in October? Should you sell now? What if you watched the amazing fall from the sidelines – should you buy now?

NFLX from Google Finance (http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1319716458318&chddm=98923&chls=IntervalBasedLine&q=NASDAQ:NFLX&&fct=big)

Henry Blodget has very well written article over at Business Insider that suggests that NFLX has gone down too far.  The article is titled “Sorry, But This Netflix Collapse Is Overdone” so you won’t be surprised that he is suggesting that at this price NFLX is too cheap. Here are the highlights of his article:

  • Netflix appears to be just going through a product transition. – If so, then it is a really tough product transition. It seems more likely that Netflix was starting to believe that it was as wonderful as the investment rags suggested.
  • It's not Reed Hastings' fault all those magazines put him on their covers a couple of years ago. – This doesn’t actually make sense – are we suppose to buy because it wasn’t his fault? Is Mr. Hastings really comparable to Mr. Bezos as the article suggested?
  • Netflix's streaming business, its future, is already at a ~$2 billion revenue run-rate, with 21 million subscribers paying $8/month. – This is true but it is based on streaming content that appears to be greatly in flux so what if subscribers quit because the quality is not sufficient.
  • At $75 a share, Netflix's market cap is $4 billion, or 2X the revenue of its product of the future. – This is probably the point that makes the most sense in Blodget’s article. Of course, I am primarily interested in fundamentals so I would gravitate to the portion of the article that required the use of a calculator.
  • Netflix's streaming business, after all, is similar to HBO's business in many key ways. – This is a fair point but HBO has easier access to consumers through the various operators and HBO typically doesn’t have a second bill that consumers have to pay where Netflix does.
  • Netflix may well prove to be a much better business than HBO, because it won't be beholden to the cable operators for distribution.  – Not sure that I buy this argument since those evil operators are a great way to get access to the consumer which Netflix needs to do with its own promotion and billing. I think Netflix’ true competition is Apple’s and Amazon’s streaming service.
  • To believe that Netflix is worth less than 2X the current revenue of its streaming business, you have to believe that content providers will always be able to sock it to Netflix whenever Netflix posts a few dollars of profit. – This is a pretty weak argument since Netflix has not shown that it can hold on to and sufficiently acquire streaming content deals.

I will be putting out an analysis on Netflix very soon. If you are not subscribed to my news feed or newsletter subscription then you are missing out and will just have to come back regularly. In that upcoming article, I will try to give some advice on where I think the price should be.

In the meantime, if you owned the stock at $300 and still own it today at 75% lower, you have already suffered the worst of your injury and you should probably hold for a bit of a rebound. If you do not own the stock today, my upcoming article will tell you if I still think the stock is a Good Company worthy of your trading and investment dollar.

The above stock chart is from Google Finance.

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