NFLX Stock Movements

Year to date, minus the past week (until July 23, 2013), stock prices for Netflix Inc. rose from $92 per share to $262 per share. Investors have held high expectations regarding this sixteen year old, video rental and streaming company.  Netflix became "the best performing U.S. stock in the Standard & Poor's 500 Index in 2013 and the second most expensive."¹  In addition, their Second Quarter Reportings stated $1.07 Billion in revenue and an Earnings Per Share (EPS) of 49 cents, in a quarter where analysts were only expecting and EPS of 42 cents.

Despite the favorable reports, Netflix stock dropped 7% in after-hours trading Monday July 22, 2013.  And, continued falling through Wednesday July 24, 2013.  For a stock raising steadily for most of its life, it raises eyebrows. Analysts were expecting 900,000 or more new subscribers during the second quarter.  This is much in part due to the debut of the new season of Arrested Development, a well beloved American Television Situation Comedy that was cancelled sooner than expected by Fox Broadcasting Company years before.  However, Netflix received only 630,000 new subscribers in the quarter.  To put it in perspective, this number is about the same as the previous year.  Arrested Development was one of five original shows that debuted through Netflix in 2013.  All shows began successfully with each one netting a higher first week viewership than its predecessor.

Netflix boasts a quantity of 27.9 million paying subscribers.  Yet, it ranks second to Home Box Office (HBO) with around 28.8 million.  Other competitors state: less than 10 million (Amazon), and greater than 4 million (Hulu).  Yet, Netflix calculates it has 1.3 million users with free trials. Simple addition shows that this would increase their totals to over that of HBO, a forty-one year old premium cable and satellite television network powerhouse.

Netflix has an annual content budget of around $2 billion, 5 percent of which is spent on originals. The company plans to continue to increase its library of films and television reruns.  It plans to soon obtain rights from Walt Disney Co. (DIS) and DreamWorks Animation SKG Inc. (DWA).  And, in the future it projects to expand its listings in documentaries and stand-up comedy.

Netflix's last annual report stated:

“To the extent subscriber and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected as a result of content licensing commitments and accelerated payment requirements of certain licenses.”

Which means that if they do not increase their numbers of paying subscribers, their services will soon diminish in quality and/or quantity.  Which is a very abysmal thought for its core consumers.

The unexpected drop in stock price is daunting especially when juxtaposed with its 2011 fall. During that year Netflix announced that it would separate its DVD-by-mail and streaming plans.  The joint plan was originally priced at $9.99.  The split caused the option of either receiving the streaming portion for $7.99 or to get both at $15.99.  Soon after this 800,000 subscribers cancelled.  The stock price per share fell from $299 in July 2011 to $63.86 in November 2011.  Nearly two years later the price has still not recovered.

Carl Icahn, an American business entrepreneur, made a $168.9 million bet on Netflix stock and options in October 2011.  He speculated that Microsoft, Amazon, or Verizon might buy the service. But, he was temporarily disgruntled in November 2011 due to the 60% increase in the subscription price.

A last reason for the drop may arise due to a comment from Reed Hastings, co-Founder of Netflix: 

"We are choosing a strategy which has us put essentially all of our domestic profit into international expansion"... "It definitely takes a strong stomach on the part of investors."

He suggests that Netflix is concentrating fully on increasing the size of its audience. Yet investors are weary of its actions and are showing reductions in their current confidence.

Bibliography

1. Yahoo Finance- Netflix Original Shows: A Costly Mistake?
2. Bloomberg- Netflix Rules as S&P 500 Index’s Top Stock, Spurs Bubble
3. Bloomberg- Netflix Tests Investors’ Risk Appetite With Shortfall