Why Netflix 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 embattled movie-rental service Netflix (Nasdaq: NFLX  ) plunged 14% today after its quarterly results and full-year subscriber outlook disappointed Wall Street.

So what: Netflix's third-quarter profit managed to top estimates, but weak streaming subscriber additions in the U.S. -- 1.2 million versus its target of 1 million to 1.8 million -- coupled with downbeat guidance for the full year reinforces concerns over slowing growth going forward. While Netflix CEO Reed Hastings downplayed the threat of increasing streaming competition, the miss suggests that the likes of Hulu Plus and Amazon (Nasdaq: AMZN  ) Prime Instant Video are gaining significant market share traction.

Now what: Netflix now sees full-year U.S. streaming subscriber gains of just 4.7 million to 5.4 million, down significantly from its prior forecast of as many as 7 million additions. "While we are not growing membership as fast as in 2010," management wrote in a letter to shareholders, "we think that over time nearly all U.S. households will be broadband households, nearly all video will be Internet video, and that as our content and member experience continue to improve faster than competitors, our long-term domestic market opportunity remains 2-3x that of linear HBO." When you couple Netflix's worrisome subscriber trends with the stock's still-lofty 30-plus P/E, however, buying into that bullishness seems particularly risky at this point.

Interested in more info on Netflix? Add it to your watchlist.

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Fool contributor Brian Pacampara has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend Amazon.com and 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. The Motley Fool has a disclosure policy.


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