Why Yesterday's Netflix Sell-Off Makes No Sense

The following video is part of our "Motley Fool Conversations" series in which we talk about topics across the investing world. This time, Tim Beyers of Motley Fool Rule Breakers and Motley Fool Supernova talks about the one number that stands out in Netflix's poorly received first-quarter earnings report.

Despite Netflix reporting better-than-expected earnings, shares of the company plunged yesterday. Why? Subscriber growth. Though Netflix expects to add 7 million members this year -- in line with its 2010 performance -- management sees just 500,000 of that total coming in the second quarter, much less than the 1.2 million that investors were expecting.

Analysts see that as a problem created by competition with the likes of Amazon.com and Apple. I'm not buying it. Amazon has a serious distribution problem, while the Mac maker (rightly) sees Netflix as a partner, having reserved space for the service on Apple TV boxes.

Meanwhile, the Internet has made content creation and distribution a global business. Hollywood matters less; creativity matters more. Google is taking advantage by creating custom YouTube channels for original programming. (I'm already getting my fill of great stuff from the brand-spanking-new Nerdist Channel.) Netflix plays a very different, but equally important, role in this rebellion, which is why today's sell-off makes no sense. Click the video below to hear more.

Although we always invest for the long term at the Fool, companies have a lot riding each time they report earnings. Earnings season can propel your favorite stocks to new heights or sink them like the Titanic. Is your portfolio poised to pop? See if you own any of these five winners in the making.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, Google, and Netflix at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 25, 2012, at 11:19 AM, funspirit wrote:

    even with growth, Netflix's shares were vastly overvalued. Vastly. first mover means less when you are distributing a commodity.

  • Report this Comment On April 25, 2012, at 11:25 AM, MINNION wrote:

    I think there is a problem with their accounting department. The only reason for their better than expected earnings report, is that they are cutting content to reduce cost.

    At this price the stock is overvalued the fair and realistic price for now should be between 45-60 dollars a share until they show subscribers growth.

    For now they are on their way to becoming "The Walking Dead". They are killing the service.

  • Report this Comment On April 25, 2012, at 11:39 AM, alexanderantonio wrote:

    Why is this still a debate? Netflix has no cash to acquire big time movie studio contracts, which = barely any movie selection at all. How in the world is Netflix going to stand up to a companies like Apple, or even Microsoft, who have lump sums of free cash on hand and have acquired those movie studio contracts? What does Netflix have that iTunes doesn't? LESS THAN NOTHING.

    REGARDLESS of the numbers, if somebody can honestly tell me that they think Netflix is going to somehow be able to stay afloat moving forward I would love to hear how.

    In my opinion the best case scenario is Netflix gets bought out by Microsoft in an attempt to compete with Apple.

  • Report this Comment On April 25, 2012, at 11:39 AM, TMFMileHigh wrote:

    @MINNION,

    >>I think there is a problem with their accounting department. The only reason for their better than expected earnings report, is that they are cutting content to reduce cost.

    Wait. There's opinion and there are facts. The fact is Netflix spent $765 million on streaming content in Q1 versus $192 million in last year's first quarter.

    @funspirit,

    >>first mover means less when you are distributing a commodity.

    Examples? Amazon distributes nothing but commodity products and services yet first-mover advantage has served it extremely well. I don't see why Netflix wouldn't enjoy similar advantages.

    On the other hand, I suppose I should be happy with the skepticism. Buying opportunities are born of skepticism run amok.

    FWIW and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On April 25, 2012, at 11:43 AM, TMFMileHigh wrote:

    @alexanderantonio,

    >>What does Netflix have that iTunes doesn't? LESS THAN NOTHING.

    Except that Apple disagrees with you. We know because of the deal that gives Netflix -- not Hulu, not Google Play, not Amazon Instant Video, but Netflix -- premium real estate on Apple TV. Right alongside the iTunes Store.

    Thanks for writing and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On April 25, 2012, at 12:53 PM, Viking70 wrote:

    Tim,

    Good commentary. I was on the fence with NFLX until this earnings report and associated future guidance. Now, I am back on the NFLX long side. Q1 was actually very good and the future guidance on subscriber growth was even better if one can get past Q2 (seems many people cannot). The biggest mistake I think the naysayers are making is international growth. It is about 10% now. Eventually it should be well north of 50%. Frankly, I cannot understand the pessimism.

    Oh, and good points regarding the comments too.

    Good luck to all.

  • Report this Comment On April 26, 2012, at 10:36 AM, alexanderantonio wrote:

    Tim,

    Thanks for your response. I personally own an Apple TV, and understand that Apple allows Netflix to coexist in the iTunes music store. But I don't think Apple allows Netflix to be there because Netflix offers CONTENT that Apple can't (besides some random movies and HBO..? I might be wrong about that). In my opinion Apple does it to keep a hold of their customers who have a Netflix subscription, bring new customers into their iTunes environment - so that they may become accustomed to iTunes/iTV, and to use Netflix as a backup just incase the iTunes store does not YET have the specific movie/show the customer is looking for.

    That being said, looking forward towards the real Apple television, and the fact that Apple is aggressively acquiring movie studio/tv show contracts, it would appear as though Apple is positioning itself to take over the video market as well. That being said, I would argue that Netflix as a mid - long term investment is very very risky. And over the past six months I believe more and more of the market has begun to realize this.

    Regardless of this debate I'd just like to add that I really appreciate everything you and this website do.

    Best,

    Alex

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