Will Netflix Recover from Its Mid-Year Blunder?

Netflix has been one of the leading video streaming and DVD delivery services on the web for years, but right now anybody in the online video space will tell you that Netflix is taking its turn in the hot seat — the stock is down from nearly 300 to around 78.  The problems started in July, when CEO Reed Hastings — after 12 years of solid management — suddenly thrust a price increase at their nearly 25 million subscribers.  Is now the time to buy the NFLX stock?

After the price increase in July, subscribers were understandably upset with the move, and decided to cancel their services.  Furthermore, Netflix did a poor job of PR with customers at the time, and stuck to the price increases despite customer complaints and threats to cancel.

This sudden bout of irrationality cost Reed and Netflix, and July and August saw the NFLX stock leveling off its steady growth over the previous year.  Then, in September, Reed had another moment of questionable inspiration and announced that he also had plans to separate the two areas of Netflix — DVD and Streaming Video — into two businesses, with the DVD service being renamed as the laughable ‘Qwikster’.  Investors were confused.

So, as October, the end of the 3rd fiscal quarter of 2011, approached, investors began a quick sell off, and the price began to plummet from 300 to near 200.  Then, Netflix adjusted its Q3 subscriber estimates from 25 million to 24 million, which meant that the pricing fiasco had cost the company over a million subscribers!  One quick look at the chart below and you can see what happened next, in mid September.

Chart courtesy of Yahoo Finance

As you can see in the chart above, the stock dropped dramatically, with two steep sell offs, and the overall effect of the year has been a drop from a peak of near 300 to 78 dollars… That’s a loss of around 70% and, as far as some investors are concerned, a massive opportunity to buy a stock that’s now priced far lower than it deserves to be.

There are several factors to look at to determine whether the stock is currently cheap and worth a buy.I’ve compiled a list of good resources to help you understand what to look at to determine Netflix’s current position.

Marketwatch took a look at the Q3 earnings report reveals that investors were expecting revenues of $930 million but that Netflix downgraded their expectations to between $700 and $823 million.

Trefis takes a close analysis at Netflix’s recent Ireland and U.K. launch plans and its Disney partnership  to determine whether the company is ready to rebound.

Seeking Alpha has a good piece on Netflix’s crafty accounting methods, and how they may confuse the issue of cash flow at the company, and recommends that investors be wary.

The Motley Fool declares that now is the time to buy, as Netflix’s fundamentals will lead the company to future growth over rivals like Amazon, Dish network and others.

Overall though, the real question here will be whether you think that Netflix is going to continue to grow as a popular service in the years to come.  They currently have over 20 million streaming subscribers in the United States, and are focused on growing that number.  In the next few years, will that number become 40 or 50?  If so, NFLX looks like a beat up stock with a great potential for growth.  If you think that Netflix will get ousted by services like Google’s YouTube Rental service (packaged with Google TVs to be launched next year) or Amazon Prime (bundled with the Kindle Fire), then Netflix is a beat up stock that’s only suffered the first of many bruisings.

Let us know what you think in the comments!