Why Netflix's Shares Got Crushed

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 online movie maven Netflix (Nasdaq: NFLX  ) were getting two thumbs down from investors today, falling as much as 26% in intraday trading after the company reported second-quarter earnings.

So what: Unlike most companies, beating quarterly Wall Street estimates just isn't enough for Netflix. Though revenue of $889.2 million -- up 13% from last year -- edged out the average estimate of $888.9 million and earnings per share of $0.11 was easily ahead of the $0.05 expectation, investors couldn't sell shares fast enough. The reason for the rush to the doors was the company's admission that meeting its user sign-up goals for the year will be "challenging."

Now what: Surprised at the crazy volatility? You probably shouldn't be. There are few stocks on the market right now that are more high-octane than Netflix. Mere hints of good news send the stock to the rafters, while even a whiff of a speed bump sends it tumbling. Based on current analyst estimates -- which could, of course, change after this earnings release is digested -- Netflix's stock is trading at nearly 30 times expected 2013 earnings. That valuation means that investors will continue to rabidly look for signs that the company's snappy growth will continue. So if you're investing in Netflix... you might want to grit your teeth and hang on tight.

Want to keep up to date on Netflix? Add it to your watchlist.

The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. 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.

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 July 26, 2012, at 9:57 PM, TruffelPig wrote:

    NFLX does not have a P/E of 30 any more - the forward P/E is more like 200 or so. Such stocks live from growth - and when they don't even live up to the own guidance, well, they get slaughtered. In particular irritant was the 1 billion hour streaming story followed by - ooops, we didn't sign as many new users as that might have implied.

    I had enough of this yesterday and sold.

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