I wrote a piece a while back talking about how Netflix (NFLX) was priced for perfection and ripe for a fall if any cracks in the dam appeared. Well, this crack is turning into a gaping hole, which the bulls will have a very hard time recovering from. So far 20% has been lopped off the stock, and I think it could be much more before valuations are reasonable.
The News
Netflix cut its third-quarter subscriber growth numbers by one million and its streaming subscriber base by 200,000 to 9.8 million. This news is not all that unexpected given our poor economic situation, but as I said above, the stock was priced for perfection and growth for as far as the eye can see. When that happens and the company inevitably doesn’t live up to expectations, the stock gets shot.
The move to raise the price of its DVD and online streaming services by 60% certainly came back to bite them. I’m not sure what management was thinking because consumers are cost-conscious in this economy and are apt to cut back on items that become more expensive, especially for non-essential items. The company also recently missed out on content deals with Disney (DIS) and Sony (SNE) as well.
Double Blow
Analysts are likely to cut their earnings estimates after this development, which is a double whammy for the company. First of all, the stock becomes more expensive based on lower estimates, and secondly the multiple that investors will pay going forward will drop sharply. The same dynamic (rising estimates/expanding multiple) that worked on the way up, will work against the bulls on the way down.
The stock is currently trading for over 22x 2012 estimates of $6.93 per share. Let’s say that comes down to $6.50 after analysts take their numbers down. I think the stock should trade for 17x forward earnings, which is still a hefty premium to the market. That would make the target price $110, which is still way down from where it is now. Of course, my estimates for what investors will pay could be off, but the general premise of a lower multiple should be correct. Any way you slice it, this stock should be lower than it is now.
Netflix Bulls Running For Cover is an article from: 
