Netflix Shares Got Crushed: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of through-the-mail and online movie kingpin Netflix (Nasdaq: NFLX  ) were getting frantically mailed back by investors today as the stock fell as much as 37% after the company reported third-quarter results.

So what: Based on the stock's action today, it might be a surprise to hear that Netflix actually beat analysts' targets for both profit and revenue significantly. For the quarter, the company notched $1.16 in per-share profit on $822 million in sales, easily above the respective $0.95 and $812 million targets.

However, the good news was badly marred by the fact that the company lost more than 800,000 net subscribers during the quarter. While a loss may have been in the cards because of the company's price hike, the size of the loss caught many investors by surprise.

Now what: Let's not get too carried away here. Though the big subscriber loss is significant, total U.S. subscribers are still up an impressive 42% from a year ago. Total company revenue gained 49% year over year, while profit per share jumped 66%. To be sure, this isn't a dead company walking.

However, even after today's massive haircut on the stock -- not to mention the 75% drop from its 2011 high -- it's still trading at nearly 18 times trailing earnings. The challenge with richly priced stocks is that investors are expecting a lot and when those hopes aren't met -- or there's at least a concern that they won't be met -- the stock market justice can be swift and brutal.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On October 25, 2011, at 3:55 PM, chadscards1274 wrote:

    Matt, good article right up until the "it's still trading at nearly 18 times trailing earnings. The challenge with richly priced stocks..." I find it ironic that NFLX that grew earnings at 66% could be called "richly priced" at 18 times trailing earnings when much slower growing companies like CMG or AMZN can go for 30-60 times NEXT years estimates. Both CMG and AMZN are growing the bottom line slower then NFLX based on analysts estimates and yet their stocks are between 2 - 5 times more expensive.

    While I understand that NFLX doesn't have the same moat as CMG or AMZN do I believe today is a vast overreaction in the market and over time this might be a good entry point. GIven buyers are usually looking at forward earnings projections this is about a cheap as I've seen NFLX in the last several years.

  • Report this Comment On October 25, 2011, at 5:51 PM, TMFKopp wrote:

    @MHenage

    Thanks for the comment! A couple of quick thoughts...

    The emphasis in the section you're referring to is that it's *still* at 18x after the big fall. I meant for that to underscore the heights that it was at previously. I wouldn't say that 18x is overly expensive now, even if I wouldn't call it breathtakingly cheap.

    The comparison to AMZN and CMG isn't a great one. In my eyes at least, those are just two more examples of wildly overvalued stocks that could take a huge hit if they whiff of disappointment. So I (just personally) wouldn't benchmark Netflix's valuation against those two.

    Again, thanks for sharing your view!

    Matt

  • Report this Comment On October 26, 2011, at 1:10 AM, walt373 wrote:

    They will be unprofitable for a "few" quarters starting Q1. Says so right there in the letter to investors. P/E of that is N/A. Would you say that is overly expensive?

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