Investors Pound Netflix’s Stock in Frustration, Valuation Now Heavily Undervalued

-17.13%
Downside
605
Market
502
Trefis
NFLX: Netflix logo
NFLX
Netflix

Source: Google Finance

Netflix’s (NASDAQ:NFLX) stock has come down in last couple of weeks despite the company’s continued efforts in areas of product development and content acquisition. The primary triggers have been company’s pessimistic outlook for year 2012, and its latest decision to raise $400 million via stock and convertible debt offering. As the company tries to maintain its financial position and compete against advancements from other players like Amazon (NASDAQ:AMZN) and Blockbuster under Dish Network (NASDAQ:DISH), it consistently faces a thrashing from investors and it seems that every move, however necessary, is being perceived negatively.

See our full analysis for Netflix

$400 Million Cash Raising Pushes The Stock Down Further

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The company announced that it is raising $400 million, half through convertible bonds and other half through offering of common stock [1] This announcement has made investors more wary about the company’s financial strength, which has resulted in the stock slumping.

First, the fund raising could be interpreted as a sign that the company may be falling short on cash to acquire new content. This is especially important because Netflix needs to fill the gap that will be created when contract with Starz ends. Second, as Wedbush Securities analyst Michael Pachter mentions, the cost of raising debt seems to be on higher side. This implies that perhaps regular debt lenders are not showing faith in Netflix’s business and therefore, the company had to come to a bargain to finally settle on relatively expensive debt raising, contingent on stock sale of $200 million.

Content Acquisition, Product Development Continues

Amidst difficulties, the content acquisition continued. One of the significant announcement was that the critically acclaimed comedy series Arrested Development will make its comeback exclusively on Netflix. [2] Additionally, the company also signed deal with Miramax to stream movies in U.K. [3]

On the product development side, Netflix introduced Just for Kids section on Wii gaming console to offer a more personalized experience for kids. [4] In another development, the suit filed against Netflix, claiming that the company had worked with Wal-Mart (NYSE:WMT) to influence pricing of DVD rentals, has been dismissed by the court. [5]

Where long-term recovery is concerned, we stay positive with price estimate of $142, more than double the market price. 2012 is going to be a tough year for Netflix but once that stage is passed, we believe that the company will recover. Therefore, current market valuation is implying a long-term suppression to the business, which may not be the case, in our opinion.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Netflix Announces Pricing of $400 Million Concurrent Common Stock and Convertible Notes Financing, Netflix Press Release, Nov 21 2011 []
  2. Netflix to bring back ‘Arrested Development’, Los Angeles Times, Nove 18 2011 []
  3. Netflix UK to stream Miramax films including Pulp Fiction, The Guardian, Nov 16 2011 []
  4. Netflix “Just for Kids” Experience Now on Wii, Netflix Press Release, Nov 22 2011 []
  5. Netflix’s Price-Fixing Suit Dismissed, Reuters, Nov 23 2011 []