Has Netflix Stock Bottomed Out Yet? (NFLX, LSTZA, AMZN, CSTR, CMCSA, TWC)

Netflix, Inc. (NASDAQ: NFLX) is suffering from the most obvious management blunders of 2011 for media companies. This stock has been punished after changing its pricing structure.  The company apologized, but it is too little too late and it looks like the damage has been done.  Now it is splitting its streaming service and its mail-order services into two names.  It has also lost its distribution pact with Liberty Starz Group (NASDAQ: LSTZA) starting next year. Silly strategies all around… Now there is a question to ask: After it is all said and done, has Netflix bottomed out after its monumental share price drop?

Netflix went under $130 on Tuesday and the new adjusted 52-week trading range is $129.37 to $304.79 and this was a $210 stock less than two-weeks ago.  After a $160+ sell-off per share, traders actually have a positive bid under this stock so far on Wednesday.  That is not the first day in the last 8 trading days that the gains were hoped for, but Netflix has closed lower than its opening price now for each of the last six trading sessions and much of that was during an up-market.

Amazon.com Inc. (NASDAQ: AMZN) and Coinstar Inc. (NASDAQ: CSTR) have just been delivered an opportunity now, actually twice in a short period of time.  Comcast Corporation (NASDAQ: CMCSA) and Time Warner Cable Inc. (NYSE: TWC) have now just witnessed the softening of what could have been a more serious ongoing competitive threat.

Thomson Reuters sees earnings growing from $2.96 EPS in 2010 to $4.53 EPS in 2011 and then again to $6.68 EPS in 2012.  The 2010 revenues of $2.16 billion are expected to be up 51% to $3.27 billion in 2011 and are expected to be up almost 37% more to $4.47 billion in 2012.  The harsh reality is that these figures need to be ratcheted down unless management decides that it is sending free movies for the kids’ Christmas stockings this year to win the hearts of the subscribers with children.  There is just no way that the company could have maintained its guidance after the carnage that has been seen.

Netflix’s customers have been in revolt.  The company just forced some of its customers to defect far faster than if the company had done nothing at all on its pricing.  Our take is a rather different one.  Our take is that it is likely that the cost basis was a losing one for many accounts and more importantly that Netflix figured out its domestic growth trends were not going to be able to be sustained.  At what point can it or will it have 100% market penetration in America?  That is not really possible.

Having close to 25 million total subscribers soon is a very impressive feat.  BUt how does it get to 30 million, then to 50 million?  The laws of large numbers and total market penetration get in the way.  As a reminder, there will never be one Netflix account per person.  The best scenario is one Netflix account per household that is in the workforce and which has the economics and demographics to support it.  The international growth opportunities are there for the company, but the move to Latin America may be slower than many hoped and Europe and Asia may take longer than expected as the company will be forced to open large data centers closer to the customers to avoid undersea fiber bandwidth congestion out the you know what.

To use a “value” scenario on Netflix almost seems silly when you consider the hyper-growth of 2010 and then again for the first half of 2011.  This is currently at 28-times 2011 expected earnings and about 19.5-times 2012 expected earnings.  Again, the problem is that this assumes the company can actually make those targets.  There is no way the investing community can expect that now.

When companies get into trouble like this, they cannot stem the fallout immediately.  You can now expect higher customer acquisition rates each quarter and the company will most certainly be spending more to retain its customers.  That in turn pressures margins and earnings.  More importantly, Netflix lost its “cool” over the last six to eight weeks.  Would it even be a shock if Netflix starts to see some loose customer contractions rather than just slower growth?  Not at all.

The bad news is that Netflix may not have seen the ultimate bottom in its stock, although seeing 10% trading bounces or more can easily be expected some time soon.  Janney Capital just maintained its “Sell” rating, but the price target is what will stand out the most: $102.00!  Fast blow-ups like this often are followed by fast trading bounces.  Netflix certainly has also not seen the end of negative headlines and analyst downgrades.  The good news is that after a $160 or $170 per share sell-off there may be a lot of insulation against bad news ahead.  Even if Netflix is close to a bottom, those old $300+ highs may not be seen again for quite some time.

There is some good news to consider as well.  If things get too bad and if Netflix can curb customer defections, someone may want to acquire it.  The market cap now is $6.8 billion.

JON C. OGG