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NFLX bleeding Red?

posted Oct 27, 2011, 9:50 PM by Mohit Kumar   [ updated Oct 27, 2011, 10:15 PM ]
The once shining star Netflix (NFLX) continues to bleed, really bleed. The stock has lost close to 74% of its value in under 4 months! Yes, the stock crumbled from over 300 all the way to mid 70's in what has left investors and analysts "shell shocked" to stay the least specially after the decline of over 35% post earnings!

Let me sum up the story and my thoughts:

The Cause of misery?
  • NFLX announced a 60% price hike causing the customers to be annoyed:
    • I strongly believe this was the right move!
    • However, the way the communication was made was very improper and perhaps quite unplanned
  •  NFLX announced a split of its streaming and DVD business:
    • Call me crazy, but again I feel this was a strategic move
    • I believe this would have allowed NFLX to focus on streaming business and eventually fade or sell off ifs DVD business!
    • However, this decision came too soon and at a very wrong time.
    • Reed reverses his decision to avoid further chaos
My Worries?
  • NFLX lost over 800, 000 members last quarter! OK I am fine with this for now
  • But, if the outflow continues for another quarter or two, the business model can crumble!
  • Here is how I see NFLX function in simple language: Get more members, charge more money, invest the money to buy more and more streaming content, as a result attract more members and continue the growth!
  • Now if NFLX continues to lose members and content providers continue to put pricing pressure, NFLX could be in trouble!
  • AMZN, AAPL will look to attack Netflix. The 2 giants are cash rich and can take the battle to any extent!
My Hopes?
  • I would like to see the loss of members to stabilize over the next quarter and the number to start going up within 2 quarters! Reed believes this should happen.
  • International expansion in UK, Ireland and Canada will hold the key. It is imperative that Netflix exhibits strong growth internationally over the next 3 quarters!
  • Appease the lost members! Launch initiatives to restore as many of its lost members as it can
  • Strike more deals with content providers and invest heavily in streaming business! This will be the core of NFLX business!
  • Reed Hastings, as foolish as he may appear today, is one of the few men who have the ability to turn the tide around!
What Next?
  • It may be worth watching NFLX perform for next 2-3 quarters
  • If we see the company returning to growth, it could be worth opening a position
  • If the company continues to stumble, exit or stay away
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