The Guest Blog

Widlitz: Netflix — Down but Not Out

Stacey Widlitz |Retail Consultant and Independent Analyst

Netflix was dropped kicked off its recent 52 week high perch today.

Not much to complain about in the reported quarter.

EPS beat nicely and revenue was in the range of guidance (although slightly below the Street).

The company ended the quarter with subscribers of over 25 million, an increase of 70% versus last year. And who wants a physical DVD anymore? 75% of new subscribers went for the streaming only option, moving the company further toward eliminating those logistical complications that come with a pesky physical product.

So why so down on NFLX? (-10% at the time of writing this). Talk about confident in your offering Netflix is raising the bundled product (streaming and physical delivery) from ~$10 to ~$16. Ouch. Click here for real time quotes for Netflix

Wait there is good news.

For those of you who have not embraced your inner technology and are sticking with the physical world only you get a price break from ~$10 to ~$8. Congratulations to the lucky few.

But for most of Netflix’s users who are moving toward streaming you do not get a price break for streaming only. And while streaming content is getting better (Mad Men and Jersey Shore fans are in luck) let’s face facts; the offering is pretty limited.

That means if you want streaming as well as access to current content you will have to join the bundled offering and pay up. For existing bundled customers a 60% increase in a monthly bill will certainly not be met with cheers.

Investors are not cheering today either as the obvious concern is hanging over the stock. What will happen to churn?

The bottom line is a price increase of this magnitude may force customers to think twice. It may even make them angry and cause them to rebel (quitting or trading down). My guess is while there may be some short-term backlash subscribers will come back. The company is betting the same with a cautious stance on Q3 and a return to growth in Q4.

While I am a pretty disciplined analyst and typically run for the hills when I hear the phrase back half weighted (Translation: We are probably missing earnings guidance this year) the stock’s pullback presents an opportunity for those with a long-term outlook. These days, I would define long-term outlook as 3-4 quarters.

Yes, Q3 may be ugly but consumers will have to find an alternative for Netflix. And there are not a lot of comparable alternatives out there. Blockbuster, which cornered 40% of the market in the good old days is gone. Hulu, HBO GO and Amazon Prime are to be watched but are no match quite yet.

is an independent retail analyst and consultant. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years