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Thursday, July 31, 2014

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  • Netflix Stock Hits 52-Week Low Amid Fear of a Potential Q3 Subscriber Debacle

    If Netflix investors were hoping that the company's decision to scrap its Qwikster spin-off might re-energize its beaten-down stock, then they're sorely disappointed as it instead hit a new 52-week low today of $111.62, down nearly 5%, even as the Dow Jones rallied by 330 points. On the positive side, the DVD reversal shows Netflix management was willing to be flexible, but on the other hand, the quick change unnerves investors looking for a steady hand on the tiller.

    Mostly though, the number 1 question now is why did management abruptly change course and dump Qwikster overboard?

    The nightmare scenario answer here is that the end of Q3 witnessed a tsunami of subscriber defections and a screeching halt to strong subscriber acquisitions that will net out to far more than the 1 million U.S. subscriber decline Netflix announced on Sept. 15th. A disastrous Q3 would be the next debacle for Netflix, raising even more uncertainty about if and how the company will recover from the Qwikster and price increase chapters. The full story will be revealed 2 weeks from today, on October 24th, when Netflix reports its Q3 results.


    Following Netflix's Q2 earnings, I estimated that U.S. churn could hit 6.5 million subscribers, an increase of about 2.5-3 million above the typical level. But I based that on extrapolating subscriber growth from prior quarters. And that was also before the proposed Qwikster split and the negative PR that surrounded it. Since then Netflix's CFO conceded the split was also hurting its Q3 subscriber acquisitions (as I previously suggested it would), though he didn't say to what degree.

    The truth is that now neither I nor any Netflix analyst has any idea what Q3 U.S. churn, acquisitions and net subscribers will be. That's a huge cloud of uncertainty, which is of course what investors abhor. Looking ahead, any analyst who's suggesting that Q4 subscribers will stabilize is basing their forecast more on hope than on any available data.

    Of course, it's possible that the Q3 results will bring good news on the U.S. subscriber front, and/or nascent international operations will show strong performance. That would certainly help Netflix management get back on track in re-building their credibility and the company's growth story.