Gravity knocked on the door of Netflix
As a traveling salesman with a rolling suitcase of self-awareness, gravity sells what growth stock investors dread buying.
Pins get taken to thriving models all the time, leaving shareholders to wonder why they didn't realize how much air had crept into their companies. They're too busy admiring how high they have gotten off the floor, without looking up to see if they're close to bumping against the ceiling.
Even though just two of the three stocks tanked on the news -- Sirius XM had a strong week -- it's important to assess what happened and reassess where they're going.
View to a kill
If you missed the ominous announcements last week, let's revisit the sobering moments.
- Sirius XM Radio revealed that revenue would only grow by 10% next year, despite a 12% price hike it plans to roll out in January. When you factor in the annualized run rate of what analysts are targeting in revenue for the fourth quarter, growth is actually closer to 5%. Is it expecting to shed net subscribers in 2012 or will there be fewer subscribers paying the new prices next year?
- Netflix's brush with mortality came on Thursday, when it revealed that it will end this month with just 24 million domestic subscribers, well shy of the 25 million it was publicly expecting in July. The shortfalls will come from both its streaming and DVD-based plans. Did Netflix's stateside popularity just peak?
- RIM posted larger than expected declines in revenue and earnings in its latest quarter. Its BlackBerry user base grew to a record 70 million smartphone owners, but this was also the first time that RIM has sold fewer handsets than it did a year earlier.
These three announcements don't seem necessarily fatal, but they're problematic on closer inspection.
Let's start with Sirius XM. The satellite radio giant expects to close out 2011 with 1.6 million more subscribers than it had on its rolls when the year began. Net subscriber growth will be a challenge in 2012, unless CEO Mel Karmazin's guidance is conservative.
Bulls will argue that the media giant's helmsman aims low, but he wasn't always that way. Just two years ago, Sirius XM was targeting 24 million subscribers by the end of this year, 26.2 million users next year, and 28.4 million accounts come 2013. Clearly he was overreaching at the time, though Sirius XM can't be taken to task for not nailing the sluggish auto market and iffy economic climate that weigh heavily on the company's success.
However, there has to be a reason why Sirius XM doesn't have the clarity to put out a 2012 subscriber target, though the visibility is there to issue revenue, adjusted EBITDA, and free cash flow estimates.
Reed 'em and weep
Netflix CEO Reed Hastings has a bigger problem. The 24 million domestic subscribers that he is now expecting is less than the 24.6 million couch potatoes it serviced just three months ago. A poorly executed pricing chance may be denting the brand at the moment, but the video rental giant is shedding net subscribers in areas that weren't affected by the increase on dual-plan members.
Are folks tired of renting optical discs? Were the investors bidding up Redbox parent Coinstar
Are folks tired of paying for streaming smorgasbords? Netflix was hit three weeks ago on news that Starz
Investors have every right to wonder if Netflix is finally at the point where it's going to continue to lose more subscribers than it wins over.
Salts on the RIM of the glass
There is going to be a point where RIM shares get so cheap that it attracts private equity vultures or perhaps even tech giants hungry for an established base of smartphone subscribers.
The problem is that RIM has now become a falling steak knife. It may be servicing more BlackBerry users than ever, but waning demand will translate into diminishing market share as carrier contracts dry up.
On a valuation basis, RIM is far cheaper than Sirius XM or Netflix, but at least those two companies have upside potential elsewhere. Netflix is expanding overseas. Sirius XM is introducing a new receiver platform. RIM can point to new smartphones and its PlayBook, but we already saw tablet shipments decelerate sharply in its latest quarter. RIM is eyeing sequential improvement, but it's already been caught reaching with its most recent targets.
All three companies will have to prove that they cheated the gravity salesman out of a sale last week. It won't be easy, because I hear that gravity can be as persistent as it is persuasive.
If you want to see how these three stocks hold up to Mr. Gravity, consider adding Sirius XM Radio, Research In Motion, and Netflix to My Watchlist.
