Is Netflix Bouncing Back?

After a catastrophic run, bulls are starting to nibble on Netflix (Nasdaq: NFLX  ) again.

Shares of the beleaguered video giant have soared 22% since bottoming out below $75 exactly two weeks ago.

You won't see too many happy campers at Netflix. This may very well be little more than a dead-cat bounce for the Los Gatos company. We can't forget that this same stock was bid up past $300 just four months ago.

However, two weeks of gains are at least comforting investors into thinking that the worst may be behind the company.

Flickering fundamentals
The outlook hasn't gotten better for Netflix during this two-week run. Things have actually gotten worse.

A lot worse.

It was two weeks ago when Netflix dropped a few bombshells on its investors.

Expansion costs won't eat into just some of Netflix's profitability as it expands into Ireland and the United Kingdom next year. Netflix is now likely to post a first-quarter deficit. The same analysts that thought that Netflix would earn nearly $7 a share just three months ago are now eyeing a profit of just $1.41 a share.

Think about that for a minute. Netflix's stock may have gone from $300 to $90, but its forward earnings multiple has actually expanded! Wow.  

Are you ready for another bombshell? The September rate hike that was supposed to jack up average revenue per subscriber is having the opposite effect. Instead of paying as much as 60% more for their Netflix fix, couch potatoes are choosing sides, paying less for either streaming or optical discs by mail. After years of torrid growth, analysts see revenue climbing just 16% -- and that's with all of the overseas expansion baked in.

Rock bottom
Two weeks ago may have been the ground-floor opportunity that opportunists were waiting for. There aren't too many shoes left to drop. The Netflix brand has taken a hit, but it continues to sign new streaming content deals and nab new distribution partners. Just yesterday it was revealed that Barnes & Noble's (NYSE: BKS  ) new Nook Tablet will come preloaded with Netflix's streaming app. It's a good shot at Amazon.com's (Nasdaq: AMZN  ) Kindle Fire, which will naturally have seamless access to what are now 13,000 titles available to Amazon Prime members at no additional cost.

Folks may be angry, but where are they going? Netflix is still the only company doing DVDs by mail and unlimited streaming without having to fork over for a DISH Network (Nasdaq: DISH  ) subscription. Yes, Blockbuster finally got on the unlimited streaming bandwagon last month, but Blockbuster Movie Pass is currently only for active DISH satellite television customers. And just in case you missed yesterday's report, DISH shed 111,000 net accounts during the quarter to fall below 14 million subscribers.  

Video buffs leaving Netflix will simply have to recreate its two different components separately. Amazon Prime and Hulu Plus will be there for the streaming, while Blockbuster and Coinstar's (Nasdaq: CSTR  ) Redbox will be there for the DVD rentals. If this sounds reasonable, you just outed yourself as a hypocrite.

After all, you probably screamed bloody murder when Netflix wanted to separate your DVD queues from your streaming library. Netflix listened -- nixed Qwikster -- and you're still going to create your own Netflix-Qwikster split by going through two or more rival services?

Please. If having digital video and optical discs through a centralized website is as important as everyone was pretending it was in September, Netflix won't have a problem with its prediction that it sees net additions to its service starting next month.

The long road back
Forget $300. Netflix is learning to walk again, and it would be a moral victory if creeps back into the triple digits by year's end. That's unlikely to happen. There is only so much steam that new content deals and hardware partners can give you.

Netflix will have to prove that its subscriber base has stabilized. Until then, investors will have every right to stay away, fearing that the brand is toast. It may nickel-and-dime its way higher, but the real gains will have to wait until Netflix proves that it's not simply in a slow fade.

The comeback is starting -- but it will be a long screening process.

If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.

Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On November 08, 2011, at 11:19 AM, chadscards1274 wrote:

    While I agree the road back isn't likely to be quick NFLX really is the best streaming option out there. I have tried them all NFLX, HULU and AMZN Prime. If the service doesn't offer unlimited streaming it's not competition. Sorry but paying a buck or two an episode isn't the same as what these three do. Here is a quick run down:

    NFLX = Perfect streams, intelligent queue which not only let's you save what you want to watch but also brings up the top 3 things you just watched (very handy when you are watching your way through a TV series. Remembers where you left off no matter the device, start a show online, pick it up on an iPad the. Pick up the rest on an iPhone. Decent selection of movies and TV shows and some of their new deals are for new run movies and shows.

    HULU = Better for TV can be a DVR replacement and commercials are short enough you save about 15 minutes of commercials on a 1 hour show. Queue is okay but a little harder to navigate then NFLX. Hulu has problems a lot remembering where you left off and the show will start over. Terrible movie selection almost not worth looking at.

    AMZN Prime = Jeff Bezos has some work to do. No queue absolutely inexcusable in today's competitive landscape. No remembering where you left off. Selection even with recent deals is not close to NFLX when like 15 of the top 20 shows are Star Trek related that's great if you are a trekky but gives you an idea of the limited quality selection. Buy this for the free 2 day shipping if you buy on AMZN but until Prime Video gets a queue and can remember where you left off it's extremely limited.

    Given all of this I think the NFLX concerns are overblown. Look at the pricing of AMZN stock as it was loing money to build out and look at where it is now. NFLX losing money short term to expand will pay off in spades when all of these other countries get fully going. They still have the best deal it's just different then before.

  • Report this Comment On November 08, 2011, at 1:34 PM, nhalden wrote:

    I think NF has corrected. I stated after the debacle started to happen that NF was an $85 stock, given it's market share.

    Right now there is too much going on in the market to determine who if anyone is the clear leader. NF still has it's near flawless execution (for what it is) of both it's DVD and Streaming services. However, the competition is making strides. The NF collapse illustrated what is important to consumers (notice I'm not using the term subscribers), and that is a strong selection of NEW streaming content. New, being defined as new release movies, or shortly after first run TV episodes. NF's model is to try to get new releases via DVD 30 days or so after DVD release, and streaming "some" TV content via deals AFTER the entire season has aired. - THIS IS NOT NEW CONTENT. - New to Netflix maybe.

    NF made a 1Billion dollar mistake with CW/WB. They made a deal that would give them streaming content after the seasons ran. Well HULU made a BETTER DEAL, streaming TV shows the day after with HULU + and a week or so (10 days) for FREE on regular Hulu. One can be streamed to TV the other to your computer.

    The AMC deal for what is essentially The Walking Dead, is ok ...but again after the season is over...New episodes can be watched on demand for free the following weekend, if not eariler.

    The true problem for NF is one they made by changing the industry. They revolutionized the DVD and streaming process, however they didn't recongnized that the convenience of streaming would eventually be one that required instant gratification. Unfortunately for them the speed of Technology and competition is moving faster than they are able to adapt their business model.

    If NF doesn't find a way to get into what I'll call the "real time" streaming market and compete with On demand, Hulu + and others then the stock will stay pretty stagnant and eventually drift down. The problem in a nut shell is the NF is a day late and a dollar short....no matter what deal they make...the other providers are making the same deals (probably cheaper) and offering the same content eariler.

  • Report this Comment On November 08, 2011, at 3:54 PM, Popnfresh100 wrote:

    I don't think it's at all hypocritical to go to blockbuster/ Amazon streaming and DVD kiosks. Talk about a hostility towards customers!

    That being said- I'm renewing my subscription solely because of the nook deal.

  • Report this Comment On November 11, 2011, at 4:53 AM, NetflixExpat wrote:

    "If this sounds reasonable, you just outed yourself as a hypocrite."

    What a crock. For the record, I am *not* someone who finds that alternative reasonable, so this is not a defensive comment.

    Most people left Netflix on principle. The inconvenience of their planned split into two companies was just one more thing that made people angry. People were angry because of the 2nd significant price hike in 7 months. People felt betrayed. It may be true that they also hollered about the split, but that wasn't anyone's primary reason for leaving. It's about the money, and it's about the principle. if they have to live with the inconvenience of using two different companies to get what they were getting before from Netflix, standing on principle is worth the sacrifice. Even if they have to pay the same amount they would have to pay if they'd stayed with Netflix, it is worth it for Netflix not to get that money when they've proven how little they care about the people who made them what they are...

    ...or were.

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