Five months ago, Netflix was a $300 stock.
Now it's a ~$69 stock. Below is Netflix's stock chart since the start of 2011:
It's raising $400 million at its new, clobbered stock price to fund all its new content investments.
And... it's going to lose money next in 2012.
Yes, that's the latest news that Netflix tucked into the prospectus for the stock portion of its stock and convertible bond offerings:
"We expect that consolidated quarterly revenue will be relatively flat until we can achieve positive net subscriber additions. As a result of the relatively flat consolidated revenues and previously announced increased investment in our International segment, we expect to incur consolidated net losses for the year ending December 31, 2012."
Previously, Netflix said it might lose money for the first few quarters of 2012. So this is a change.
For comparison, Netflix is projected to earn about $4.10 per share this year.
Will Netflix ever recover, or is it toast?
I'm optimistic, though this latest fund-raising and loss news is certainly an unwelcome surprise.
On a positive note, Netflix also says its subscriber cancellations in its hybrid streaming-and-DVD business are slowing, and gross additions for its streaming-only service are still strong...
Consistent with our Q4 guidance, our domestic streaming and DVD gross cancellations continued to steadily decline in October and the first half of November, while gross additions of new streaming subscribers remained strong. As a result, consistent with our prior guidance, we continue to expect our domestic streaming net additions to be about flat for November as a whole and strongly positive for December.
COMMENTARY: Netflix's problems all began back on July 12, 2011, when it decided to eliminate its $9.99 monthly unlimited DVD-rental and streaming combination plan. Instead, Netflix separated DVD and streaming services into two separate plans, each priced at $7.99. A combo plan will still available, but at a new price of $15.98 per month, an increase of roughly 60%.
Netflix also offered a a standalone DVD rental plan that let users check out two discs at a time for $11.99 per month. The $7.99 DVD rental plan only let users check out one title at a time. Netflix executives had no idea the uproar that the new pricing structure would create among its 24.6 million subscribers in the U.S.
Immediately following the price increase, Netflix's customer service email box became flooded with incoming emails from angry customers complaining about the price increase. This sparked a subscriber revolt and many of them cancelled their subscriptions, but it wasn't until later that Netflix realized the magnitude of the problem.
On July 13, 2011, Netflix's stock price peaked at $298.73. Poor U.S. economic data and the sovereign debt problems in the Eurozone hit the stock market hard beginning in mid-July and the market did not begin a recovery until mid-August. But, as you can see from the chart below, Netflix shares continued to their slide even after the DJIA and NASDAQ began to recover.
Click Image To Enlarge
On September 19, 2011, the Netflix CEO Reed Hastings said he was sorry for mishandling the price increase that caused customers to cancel the service in droves. But the apology was drowned out by a decision that angered subscribers all over again. Netflix announced that it would split into two services -- the DVD by-mail rental service would be named Qwikster and Netflix would continue offering online streaming of TV shows and movies. The split-up of the two services caused confusion in the marketplace and complicated what was a simple DVD rental business.
By the end of September 2011, Netflix stock had dropped to $113. 27 per share, a decline of $185.46 or 62% of its market value since the July 13 peak.
In its earnings call of October 24, 2011, Netflix announced its third quarter ending September 30, 2011 financial results. Netflix reported that domestic revenues were $799 million, an increase of 44% over the same nine-month period the prior year. The company also reported a domestic operating profit of $120 million and a profit margin of 15% for the year.
Netflix also reported that it ended the third quarter 2011 with 21.4 million streaming subscriptions and 13.9 million DVD rental subscriptions. It also reported that unique domestic subscribers declined to 23.8 million subscribers, and that the decline was due to a higher than expected level of cancellations and lower number of new subscriptions due to the negative press it had received. Netflix claimed it had 4.7 million new subscriber additions for the third quarter.
Netflix CEO Reed Hastings began the earnings call by saying,
"What we've seen is a second wave of cancellations from the price increase.The first wave was in July upon announcement, and the second wave has been in September and October as people become more aware of the price increase and then either change the plan or cancel. And that wave has been declining very steadily over the past couple of weeks. And so we have substantially less weekly cancels now than we did just three to four weeks ago. So that's what gives us confidence that it's this wave passing through."
On October 25, 2011, Netflix shares plunged to $77.37 from $118.84 the day before, when it revealed that it ended September 2011 with 23.8 million U.S. subscribers--a drop of 800,000 from June 2011 and far worse than anything that the company had hinted at before. Netflix also warned that it expected more defections in the coming months.
The results prompted a downgrade to "Neutral" from "Buy" from Citi Investment Research analyst Mark Mahaney, who also slashed his target price on the stock to $95 from $220. The analyst called the price increase and the abandoned plan to separate Netflix's DVD business two "major execution errors."
Netflix's plans to raise an additional $200 million to fund its content production and acquisition activies via notes receivable convertifle into Netflix stock at $85.00, presents a real problem when its stock is currently trading at $69.00. It also announced in its notes prospectus that it will lose money in 2012.
Netflix could not have timed the sale of that $200 million in notes at a worse time, when its stock price has been downgraded by analysts, its shares have already plunged $229 or 57.5% since the July 13 high, and it is has forecasted losses in 2012. Technology Crossover Ventures will be the lucky investor buying those notes, and have the right to nominate one person to the board of Netflix. Netflix shares have dropped another 5 points since the announcement of those notes. Are those guys having any second thoughts? Makes you wonder just how low Netflix (NASDAQ:NFLX) will go before the hemorraging finally ends.
In summary, it's absolutely mindboggling how negatively a simple price change can do to your earnings and stock price in a little over four months. One day you are the darling of Wall Street, and the very next you are being scoffed and shorted. If you are a public company or small privately-owned company, think before you start increasing prices.
Courtesy of an article dated November 22, 2011 appearing in Business Insider
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