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Can Netflix Bounce Back After Last Week's 14% Drop?

By Rick Munarriz - Apr 25, 2016 at 9:07AM

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The leading premium streaming video platform suffers a double-digit decline in its stock price after a problematic quarterly report.

It was a rough week for Netflix (NFLX 3.55%) shareholders. Netflix stock plunged 13.8%, with most of that coming after the undisputed champ of premium streaming offered up weak subscriber guidance for the current quarter. 

It's certainly disappointing to see Netflix follow up a record first quarter with guidance calling for just 2.5 million net additions during the second quarter. That would be the worst showing for Netflix in two years, but it wasn't the only thing holding the stock back. (AMZN 0.19%) crashed Netflix's party a day before it was set to report quarterly results. Amazon began offering the unlimited video streaming catalog that it makes available to Amazon Prime subscribers at no additional cost -- Prime Video -- as a stand-alone monthly service. Folks can now pay $8.99 a month for Prime Video. That undercuts Netflix at $9.99 a month, but price hasn't necessarily been a deterrent for subscribers in the past.

Netflix's most popular plan that offers high-def streaming on two concurrent screens has gone from $7.99 to $8.99 to $9.99 a month over the past two years, and it hasn't slowed the influx of new customers. In fact, we've seen Netflix's global subscriber base grow from 48.4 million to 81.5 million since its initial price hike two years ago. Even if we narrow the focus to the slower growing and more mature U.S. market -- where the price hikes have had the most widespread impact -- we've seen the streaming user base grow by 32% over the past two years. If the arrival of HBO Now, Sling TV, and countless other streaming platforms haven't slowed Netflix down it seems highly unlikely that Prime Video as a monthly service will fare any better.

The arrival of Prime Video as a more direct competitor, rather than just a side perk for folks feasting on two-day shipping from the leading Internet retailer, isn't as problematic as it might seem. A year of Prime Video on a monthly basis is actually more than Amazon Prime on an annual basis. Selling Prime Video by the month actually improves the value proposition of Amazon Prime, and that's likely the goal behind this move.

Even under the scenario that Prime Video becomes a legitimate challenger for primetime eyeballs, unlikely as it may seem, it could motivate Netflix to do something that it should be doing already. A big selling point for Amazon's video platform over Netflix is that it also allows folks to rent new releases on a piecemeal basis. You can pay $5.99 to stream The Revenant on Amazon's service between episodes of Transparent or old HBO shows, a movie that is unlikely to be available on Netflix for years. If Prime Video gains traction it could lead to Netflix following suit, and with more than 81.5 million subscribers worldwide -- and counting -- there's a lot of money to be made by Netflix if it can offer its users more than just the content in its digital smorgasbord. 

As for the subscriber forecast, it's not as shabby as it seems. Netflix routinely underestimates its magnetism, and the second quarter is a seasonally slow period for the platform. The sell-off may have been warranted given the weak guidance, but it's not so bad with the ceiling getting higher as rate hikes for its longest users set to kick in as early as next month.

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