What happened
Shares of streaming powerhouse Netflix (NFLX +0.57%) got pummeled in afternoon trading Tuesday, falling 5.3% on a one-two-three punch of bad news from Wall Street.
In rapid succession, Netflix suffered a price target cut, a negative preview of its third-quarter earnings report, and a scathing criticism of the company's plan to add an ad-supported tier to its streaming service.
NASDAQ: NFLX
Key Data Points
So what
Tic-tac-toe, three in a row, it's nothing but bad news for Netflix today, beginning with StreetInsider reporting that Goldman Sachs has trimmed its price target on the streaming stock to $182 -- and maintains a sell rating on the shares.
Also weighing in with a sell rating today is Bank of America, which actually started off on an optimistic note -- backing Street estimates that Netflix will add 1 million subscribers in its Q3 report (due out next week), report $7.8 billion in revenue, and earn $2.10 per share. Sadly, BofA's preview quickly turned negative, with the banker warning that Netflix may only have gained subscribers in the quarter because of season four of Stranger Things. Far from an indication of strength, BofA says this reinforces its view "that sub adds may be vastly more hit driven than prior years," and that "Stranger Things will be a tough act to follow" in future quarters.
But what about Netflix's plan to add advertising-supported subscriptions to its lineup, you ask? BofA warns, "we don't think [an ad supported streaming plan] is the catch-all answer." And echoing that sentiment, a third analyst -- Pivotal Research -- has just weighed in, warning that investors' hope that selling ads will reverse Netflix's declining subscriber numbers "looks misplaced." As The Fly relates, Pivotal thinks this is a "defensive not offensive" move on Netflix's part. And it brings with it significant risks.
Now what
What risks, precisely? For one thing, ad-supported tiers generally price below the cost of ad-free tiers in streaming. If Netflix doesn't bring in enough ad revenue to offset revenue lost from charging less per subscription, therefore, then even growing its subscriber numbers may fail to improve the company's revenue, or profits. Pivotal also worries that Netflix could suffer a "product perception" risk (i.e., its streaming service will be perceived as less "premium" once it starts selling ads like everyone else), as well as a "variability" risk, as Netflix's revenue stream becomes dependent upon the health of the advertising market.
All of these risks are, of course, risks Netflix doesn't carry today. And it's certainly possible that investors might be less willing to pay a premium price in the future for a stock that's getting riskier over time. While Netflix stock at just 20 times earnings today may seem like a safe bet, the risks are increasing.
Caveat investor.
