Netflix’s Stock Deserves a Second Look, Despite PR Bungling

Netflix (NASDAQ:NFLX) inched higher during the week last week after its precipitous 40+% slide over the last month following the announcement that it will raise its prices and spin off its DVD unit. However, the company Monday surprised markets with its plans to abandon its Qwikster spin-off. After opening over 10% higher in what looks like early short covering, the stock continued to drift despite the company’s latest move. While we believe CEO Reed Hastings has done a terrible job communicating these latest announcements with customers and shareholders, the company still has strong growth potential and now warrants a second look as the selling looks overdone.

See our full Netflix analysis.

Hastings Scraps Qwikster Announcement

Although the operations will separate on the business side, the end customers will perceive no difference and will continue to enjoy the simplicity of having single account to manage both, DVDs and streaming. This shows two things about the company. Firstly, Netflix is willing to reverse its decision and give the customer what he and she wants despite having egg on its face. Secondly, it highlights that the company is probably not thinking through its moves thoroughly enough.

Netflix is not at startup stage where it can dramatically shift course without explaining itself better. It also isn’t big enough where it can afford making too many major mistakes like this last one. These latest moves have cost the company about $9-10 billion in market cap if we take a look at where the stock was before the announcements.

Despite Bungling, Outlook is Solid

Overall, we have the impression that Netflix is trying to mend relations with its customers who are irate over the handling of the recent announcements.

We have a $195 price estimate and believe that the company is generally on the right track with building its streaming content. While the Qwikster announcement and price hikes were a public relations disaster, we believe the fundamentals of the business remain strong and that its service is well ahead of its primary competitors.

In CEO Reed Hasting’s blog post announcing the decision, he pointed to positive developments included Netflix’ attempt to improve streaming content.

We’re constantly improving our streaming selection. We’ve recently added hundreds of movies from Paramount, Sony, Universal, Fox, Warner Bros., Lionsgate, MGM and Miramax. Plus, in the last couple of weeks alone, we’ve added over 3,500 TV episodes from ABC, NBC, FOX, CBS, USA, E!, Nickelodeon, Disney Channel, ABC Family, Discovery Channel, TLC, SyFy, A&E, History, and PBS.

The company’s bidding war with Hulu over exclusive rights for new episodes of Arrested Development and a multi-year exclusive streaming deal on AMC Networks for the 1st season of The Walking Dead are some examples of this from the past week.

The primary risks to the business, and our price estimate, comes from Dish Network’s (NASDAQ:DISH) Blockbuster and Amazon (NASDAQ:AMZN), which are putting additional weight behind their streaming push. Also slower than expected international expansion would lower our estimates, especially in Latin America.

We note that Netflix will release its Q3 2011 results on Oct 24. These results, and future outlook will be critical in determining where the stock heads in next few months.

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