The Bull (Or at Least Less Bearish) Case for Netflix
Netflix cut its guidance yesterday, investors killed the stock, and now the “Netflix can’t lose” narrative has flipped to “Netflix is hosed.”
But the news that Netflix miscalculated the effect of its price hike, and now expects to lose subscribers this quarter, doesn’t seem quite so bad once you peer at the numbers for a second.
As Dan Frommer reminds us, almost all of the shortfall comes from the video rental company’s customers who only want to rent DVDs. And as Netflix has said — over and over and over — it doesn’t want to be in the DVD business.
It just said it again yesterday, in fact: “Our future is that of a streaming video company, not a DVD-by-mail company,” Netflix content boss Ted Sarandos explained at an industry conference.
And while Sarandos and everyone else at Netflix explains that they’re happy to have DVD customers for now, and that they want to let their DVD unit do better by operating as a standalone unit, etc., there are plenty of people — including me — who believe that the company’s price hike was designed in large part to kill off its DVD business sooner than later.
So mission partly accomplished!
If I had to guess, I’d guess that market freak-out yesterday is due in part because this may be the first time Netflix has had to come back to investors and acknowledge that it got a forecast wrong. A big chunk of the company’s appeal comes from the aura that CEO Reed Hastings projects: You guys always doubted me, but I’ve always been right. Not that I’m boasting or anything.
If you want to worry about Netflix’ future, then the core question is whether they’ll be able to wrest enough content from the big studios to keep their streaming customers happy.
Losing the Starz deal, which will keep Sony and Disney films out of their hands (for now) seems like a much bigger deal. But that news didn’t hurt Netflix stock nearly as much. Go figure.