If you recall back on July 28, I made a bearish case for Netflix’s (Nasdaq: NFLX) future. On that same day, shares closed at $262.
[Last Thursday], the company confirmed my prediction when it announced that both subscriber growth and its new pricing plan have failed to live up to expectations.
And what do you know… shares opened [last Friday] at $167. Now that’s what I call a down-stream move!
But it’s not over yet. As a momentum stock, the shares have clearly broken their uptrend. And I think Netflix shares are headed even lower.
[ad#Google Adsense 336×280-IA]It’s not that the company isn’t doing the right thing – because it actually is. The original event that made me bearish was its decision to charge much more to customers for streaming content and DVD rentals… I’m talking over 40% more.
The choice was to take one for less, or to take both for much more.
Well, subscribers (myself included) decided that one was better than both. And in some cases, judging by the increased churn rate, none was an even better option.
In fact, I downgraded my subscription to an even lower price point because I just didn’t need, nor had the time to watch, 10 DVDs a month.
While Netflix is doing the right thing by trying to make subscribers switch over to their streaming model (it costs less to fulfill), there’s one major problem that’s gotten even worse since I penned my first Netflix article: selection.
You see, the selection from its online library is pathetic. Besides a few dozen current releases, most of what they have is stuff that I really don’t want to watch. Or stuff I can just watch for free from other providers.
To make things worse, Netflix’s partner, STARZ, decided that it would no longer provide Netflix with content. Mainly because it realized that it would lose money if people could get stuff for a lower bundled price than paying a premium for its library.
Additionally, competition is heating up from the likes of Walmart (NYSE: WMT), Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL). So now you have a situation where Netflix, while still a major player, isn’t as deep-pocketed as its potential competition. It now faces the risk of becoming involved in a purely commoditized business, especially if its original content providers, like STARZ, decide to balk.
Bottom line: Netflix has a great model, for now. International expansion will help. More subscribers will sign up over time. But the heady days of massive quarter-over-quarter growth are behind this company. After all, there’s nothing worse than a growth warning when you’re a momentum stock!
Ahead of the tape,
— Karim Rahemtulla
[ad#jack p.s.]
Source: Wall Street Daily