Netflix investors overreact, run for cover
Posted
Apr 25 2008, 09:19 AM
by
Kim Peterson
Netflix shares had run up 78% from mid-January -- a considerable accomplishment helped along greatly by Blockbuster's ongoing struggles. But the stock price tanked this week, with investors acting the way my cats do when the vacuum is turned on.
Instead of enjoying the good news (a solid first quarter, a big subscriber increase and a virtual lock on the DVD-by-mail market), investors overreacted and dumped Netflix over the bad. Netflix lowered its full-year profit projections, partly because it's spending more to build out a service that streams movies over the Internet. The company will also start charging more to customers who want to rent high-definition Blu-ray discs. Gross margin dropped more than 4%.
Netflix shares dived 23% from Monday to Tuesday, but are starting to climb back up as investors realize that the news isn't really that tragic. Here's why:
The guidance is mostly good. Full-year profit will be down, yes, but only slightly. EPS dropped to between $1.16 and 1.29 from the previous guidance of $1.18 to $1.30. The company actually raised guidance on revenue (now $1.35 billion to $1.39 billion, up very slightly from before). Its subscriber guidance also increased, to between 9.1 million and 9.7 million, from 8.9 million to 9.5 million.
Subscriber acquisition costs plummeted. The company only paid $29.40 to win the average subscriber, down from $47.46 a year ago and $34.60 in the preceding quarter.
Churn dropped. To 3.9%, down from 4.4% a year ago. Fewer subscribers are canceling -- a good sign.
Q1 numbers look good. Profit went up year-over-year to $13.4 million from $9.9 million, and revenue increased to $326.2 million from $305.3 million. The profit matched what analysts were expecting, but revenue was a few hundred thousand dollars short of what the Street wanted.
The Blu-ray price hike affects few customers. Blu-ray discs cost more than standard DVD discs, even for a high-volume buyer like Netflix. As a result, Netflix said it will implement a "modest" subscription increase just for those customers, who comprise less than 10% of the total subscriber base.
So all is not rosy in Netflix land. The company is in the middle of a transition, from DVDs to Blu-ray and to online distribution. That takes time and money. Netflix has been a good bet so far this year. Instead of nervouly dumping shares in this transition, investors should stick around and see where the company goes from here.
Disclosures: I don't own shares of any companies mentioned in this
post, but I am a Netflix subscriber. And while Microsoft owns this blog, Microsoft does not control,
censor or otherwise have any editorial influence over what I write.
