Behind the Money

Netflix Gets Award For Most Confusing Trade of 2012

Netflix bulls felt as smooth as Don Draper of Mad Men in the first quarter of this year, only to then find themselves as lonely as Steven Van Zandt’s character in Lillehammer in the second quarter.

Jon Hamm as Don Draper
Source: AMC

As the first half of the year comes to a close, the streaming movie company had the biggest negative about-face in the second quarter of any stock in the S&P 500 . The stock was nearly a double at its high in February, but has since crashed 50 percent. It’s now down for the year.

“It’s a busted growth stock,” said James Lebenthal of Lebenthal Asset Management. “Even after this price decline, Netflix is still trading at 35 times next year’s earnings.  They’ve lost the trust of the growth stock community.  Once these things break, it is hard for them to find love again.”

Netflix lost that love by giving a disappointing outlookfor streaming subscribers in April. The company said net streaming subscriber adds would only be as much as 790,000, whereas analysts were expecting more than one million.

“Netflix is very close to hitting a maturity wall within its addressable market here in the U.S.,” wrote David Miller, an analyst with Caris & Co., in a note to clients on May 18 where he cut his price target to $56.  “For lack of a better phrase, if indeed Netflix is hitting maturity within its addressable market, then we would question the multiple the market is currently paying up for the stock.”

On the cost side, investors and analysts are worried increased competition raising prices for content. For example, Amazon said it is putting out an instant video app for Microsoft’s Xbox. Also content providers themselves, like HBO, are having success with their own direct-to-consumer application.

Not to mention, the company faces a showdown with the cable companies as they consider a switch to a tiered-pricing strategy for their broadband plans. This would make it more costly for the passionate Netflix fans and so-called cord-cutters.

“The sellside basis for liking them is that they have a lot of subscribers, so they’ll figure out how to monetize,” said Michael Pachter of Wedbush Securities. “The only way for that to happen is for Netflix to raise prices, and if they do, their subscriber number will turn negative.”

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