After a catastrophic run, bulls are starting to nibble on Netflix
Shares of the beleaguered video giant have soared 22% since bottoming out below $75 exactly two weeks ago.
You won't see too many happy campers at Netflix. This may very well be little more than a dead-cat bounce for the Los Gatos company. We can't forget that this same stock was bid up past $300 just four months ago.
However, two weeks of gains are at least comforting investors into thinking that the worst may be behind the company.
The outlook hasn't gotten better for Netflix during this two-week run. Things have actually gotten worse.
A lot worse.
It was two weeks ago when Netflix dropped a few bombshells on its investors.
Expansion costs won't eat into just some of Netflix's profitability as it expands into Ireland and the United Kingdom next year. Netflix is now likely to post a first-quarter deficit. The same analysts that thought that Netflix would earn nearly $7 a share just three months ago are now eyeing a profit of just $1.41 a share.
Think about that for a minute. Netflix's stock may have gone from $300 to $90, but its forward earnings multiple has actually expanded! Wow.
Are you ready for another bombshell? The September rate hike that was supposed to jack up average revenue per subscriber is having the opposite effect. Instead of paying as much as 60% more for their Netflix fix, couch potatoes are choosing sides, paying less for either streaming or optical discs by mail. After years of torrid growth, analysts see revenue climbing just 16% -- and that's with all of the overseas expansion baked in.
Two weeks ago may have been the ground-floor opportunity that opportunists were waiting for. There aren't too many shoes left to drop. The Netflix brand has taken a hit, but it continues to sign new streaming content deals and nab new distribution partners. Just yesterday it was revealed that Barnes & Noble's
Folks may be angry, but where are they going? Netflix is still the only company doing DVDs by mail and unlimited streaming without having to fork over for a DISH Network
Video buffs leaving Netflix will simply have to recreate its two different components separately. Amazon Prime and Hulu Plus will be there for the streaming, while Blockbuster and Coinstar's
After all, you probably screamed bloody murder when Netflix wanted to separate your DVD queues from your streaming library. Netflix listened -- nixed Qwikster -- and you're still going to create your own Netflix-Qwikster split by going through two or more rival services?
Please. If having digital video and optical discs through a centralized website is as important as everyone was pretending it was in September, Netflix won't have a problem with its prediction that it sees net additions to its service starting next month.
The long road back
Forget $300. Netflix is learning to walk again, and it would be a moral victory if creeps back into the triple digits by year's end. That's unlikely to happen. There is only so much steam that new content deals and hardware partners can give you.
Netflix will have to prove that its subscriber base has stabilized. Until then, investors will have every right to stay away, fearing that the brand is toast. It may nickel-and-dime its way higher, but the real gains will have to wait until Netflix proves that it's not simply in a slow fade.
The comeback is starting -- but it will be a long screening process.
If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.
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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.