Netflix’s (NASDAQ:NFLX) stock dipped further following CEO Reed Hasting’s apology and subsequent announcement to rebrand its DVD-by-mail business with the quirky Qwikster name. The stock has lost more than half of its value over the past couple of months and the bleeding has only continued with the recent announcements. The option market suggests that there could be big swings in its stock price in either direction, implying that investors are split on the company’s ability to pull out of the current slump and tackle the advances of competitors like Amazon (NASDAQ:AMZN) and Dish Network’s (NASDAQ:DISH) Blockbuster.^[1] We believe that the company mishandled the latest announcements of its price increases and then business split, but we also recognize the company is pinning its future on streaming and so is reorganizing to best support these efforts.

The Silent Majority

Many Netflix customers have reacted bitterly to the company’s recent developments. Netflix announced an effective price hike on its combined streaming and DVD package, and then in explaining this move announced that it would break the two businesses apart and force customers to re-register for the DVD subscription. In retrospect it appears that this has been the plan all along, but we can think of several scenarios where the company could have done this more subtly for a smoother transition. The ultimate damage will show up the subscriber data for its DVD business.

Despite this mishandling, we believe that the vociferous complaints might not reflect the sentiments of the broader Netflix customer base. Netflix still has far and away the best streaming service and so that these customers are no worse off, and we expect Netflix to see cancellations accelerate on its DVD business as it forces customers to sign up under its new system. Overall, we believe that most customers still like Netflix’s service and will likely stick around until a serious competitor emerges.

Streaming Expansion

Though its break up with Starz is a minor blow, the company is committed to make its streaming catalog better. We believe the company will replace this and content and is clearly committed to growing its library, which will attract more users over time.

Its international operations also present tremendous growth potential. We estimate that international streaming constitutes 30% to Netflix’s stock. This is based on our expectation that over the course of next 6-7 years Netflix will gain close to 20 million subscribers. There is low competition outside and reception of service in Canada has been encouraging. Perhaps the investors are overlooking this factor amidst domestic chaos.

The restructuring will take its toll on DVD subscribers and so this is being reflected in the stock price; however we still believe that for Netflix’s core offering and value is intact and so expect shares to recover from this most recent slump.

Our price estimate for Netflix stands at $195, implying a premium of about 50% to the market price.

See our recent notes:

Netflix’s US and Int’l ARPU Should Converge with Qwikster Announcement

Hastings Apologizes, Announces DVD & Streaming Split for Netflix

Netflix Estimate Revised to $195 on New Guidance

See our complete analysis for Netflix’s stock

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