The Quiet, Frightening Decline of Netflix

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On Thursday the S&P 500 sees it’s biggest percentage and point jump since December 1, 2010 and yet the stock that is its best performer (+202 percent!) over the last 52 weeks, does not participate in the rally: Netflix.

It closed down half of a percent, adding to the steady, quiet decline that has chopped $40 (18 percent) off Netflix’s stock price in 12 trading days.

It’s been the swiftest, sharpest decline in Netflix shares in the last year and yet the media coverage has been fairly muted for a stock that garnered dozens of headlines every time it hit a new record high.

For evidence check out a Google Trends chart for the term “Netflix stock”: it eerily mirrors the stock price, with interest peaking about 2 to 3 weeks ago.

The sudden reversal in fortune doesn’t surprise Jefferies Analyst Youssef Squali. “For the last three years—Netflix has been in a sweet spot with regards to competition: Blockbuster went bankrupt, Hollywood Video went bankrupt, and in the online arena Amazon and Google have been ‘mum’ on plans for a competing video streaming service. Until now.”

Squali points to two critical events that toppled on Netflix’ shares. First, Amazon purchased LoveFilm for $200M, a Netflix-like streaming service based in Europe that could close Netflix out of the continent.

Second, the more recent news that Amazon will give its “Prime” members (estimated at 5 to 10 million by Squali) free access to streaming movies. Squali downgraded Netflix to ‘hold’ from ‘buy’ in December, and currently has a $210 year-end price target on the shares.

You’d think this would all be great news for Amazon shareholders. But you’d be wrong. Shares of Amazon, too, have also quietly cratered, down 10 percent. Is this the sound of a dot com bubble bursting? Sorry: this is a spoiler-free blog.

For more on a possible ‘bubble’ in tech companies (both public and private) check out the Strategy Session Friday at noon on CNBC. Dana Stalder, a venture capital veteran from Matrix Partners, reveals where he’s seeing value, and froth, in Silicon Valley’s newest firms.

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