Netflix’s Stock Reaction Overdone As Streaming Gains Traction

Netflix (NASDAQ:NFLX) recently reported its Q2 2012 earnings and the stock plunged as the company lost net subscribers in the U.S. once again. However, we lose out on the details if we look at the results this way. The company actually gained more than 500,000 streaming subscribers in the U.S., which is where the future growth lies. ^[1] It so happened that the decline of about 850,000 DVD subscribers made overall U.S. figures look bad. ^[1] DVD decline is inevitable and not unexpected. Before jumping to conclusions, we should be aware that Q2 tends to be seasonally slower and given that Netflix’s base has grown to significant proportions, the seasonality impact is likely to be more prominent.

We have lowered our price estimate for Netflix to $96, which stands at a premium of 60% to the market price. Given Netflix’s recent disclosures, we expect that the company will continue to invest heavily in content for international expansion and therefore, the costs are likely to remain quite high for at least a couple of years. Nevertheless we do feel that market has overreacted to the results.

See our complete analysis for Netflix

Certain positives remain

The company seems to be getting good adoption in international markets which could become an integral part of its business over the coming years. In fact, Netflix has exceeded the penetration of 10% in Canada, gained over 1 million subscribers each in Latin America and U.K. & Ireland. ^[2] Furthermore, the company’s lead over Amazon (NASDAQ:AMZN) in the U.S. in terms of viewing hours has widened. ^[3]

Perhaps the market believes that Netflix will not be able to effectively monetize all the content that it has acquired and that a significant amount of content obligations will eat up the business’ value. Ultimately, it all boils down to whether the subscriber expansion and continue and how the churn figures are likely to trend.

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

1. Netflix’s Letter to Shareholders, Q2 2012 [↩] [↩]
2. Netflix’s Q2 2012 Earnings Transcript [↩]
3. ref:1 [↩]