Netflix is Going Down Hard
It was only a few months ago that Netflix's share price was flirting with $300 and the company was on an insane growth trajectory with nothing standing in its way. Unfortunately, Netflix became its own worst enemy.
Since the summer, NFLX shares have sunk deeply, dipping below $70 today. And we're not talking about the fluctuations of a chaotic market—it's been a steadily downhill ride the company's stock. The worst part? Analysts think the Netflix's insane downward spiral is far from over.
First, the problems: CEO Reed Hastings baubled the puck, so to speak, one too many times. In other words, he messed up and then messed up the fix to his mess. This has triggered diminished subscribers and stifled growth. Combine that with a valuation cut by more than three-quarters, and cash flow issues—which Netflix has suddenly become inundated with—are bound to arise. And with cash flow concerns come fleeing investors, especially in a fragile global economy.
Wedbush analyst Michael Pachter wrote in a note to investors yesterday, "Netflix ended the third quarter with $366 million of cash and short-term investments, significantly less than the amounts owed by the company for streaming rights." This is bad news, particularly when one considers that Netflix also announced that it expects to post a loss in its 2012 fiscal year, stunning analysts. Michael halved the stock's 12-month price target from $82.50 to $45, pointing out that "Netflix's wounds are self-inflicted [and] there has been no assurance that a return to profitability would occur in 2013."
Netflix wrote in a Securities and Exchange Commission filing, "we are unable to repair the damage to our brand and reverse negative subscriber growth. Our business, results of operations, including cash flows, and financial condition will continue to be adversely affected." As a result, analysts at Canaccord yesterday switched Netflix to a "sell" rating and lowered its price target to $60. Morgan Stanley also dropped its price target for Netflix.
In the last month, Netflix shares have sunk 41%. During the third quarter, the company lost more than 800,000 subscribers.
