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When One Mistake Shadows a Stock Till the Grave

July 31, 2012 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
Every good movie has an ending. While Netflix (NFLX) has managed to demonstrate a unique ability to stretch its creativity and innovation, this time round things don’t look all that great. Some members of the bearish incline argue that Netflix’s current position raises a lot of questions about its future. Are the end credits tethered around the corner?

While I can’t give conclusive answers to this question, I acknowledge the fact that Netflix is wedged between a rock and a really hard place. Not only did Netflix’s share dip beyond control last week (by beyond control I mean a 52-week low) but the media bigwigs also posted disappointing earnings during its latest report.

Disgruntled shareholders have been left to scrape in a paltry $6.2 million profit, presenting a 91 percent plunge from $62.2 million on a year-over-year basis. All the same, it was an improvement as last quarter Netflix dipped below the dreaded break-even point, recording losses of $4.5 million in what many described to be the end of the movie streaming heavyweight. Improvement or not, one big question lingers, what is happening to Netflix? Better yet, with this kind of performance, what does the future hold in store?

This article intends to delve into the possibilities and establish whether there is still some shred of hope buried within the rubble.

What starts well doesn’t necessarily end well

In as much as the year is still far from over, Netflix’s hopes continue to dwindle and I don’t see Netflix turning around any time soon.

Interestingly, the current situation is a complete foil of what was witnessed in the beginning of the year.

At the onset of the year, investors were bullish following the positive earnings released for the fourth quarter. At the time, investors’ hopes were traceable to the idea that Netflix had posted an increase in revenue despite the dip in profits on a year-over-year basis.

A few months into the year, things got tighter as temperatures reached vitriolic boiling points. The evident seed of despondence at Netflix had begun bearing fruit. Things went haywire, one rushed decision led to another even more rushed decision and, at the end of it all, shareholders were faced with tougher financial woes. This pretty much sums up the Netflix that we have today, minus the endless criticism and scrutiny, of course.

What went wrong?

While it is good to try and objectively identify the deathblow, it is more important to try and establish the possibilities extended to investors. After all, they are the ones who will suffer an eroded portfolio in the event that Netflix continues its downhill journey.

I think management got too attached to the DVD by mail service – the once high-profit-maker had bungled it. The DVD-by-mail service stole the thunder from local video stores after stamping out late fees and providing a flexible option. Netflix’s attachment later proved to be costly after it tried overhauling its streaming service at the expense of the DVD by mail service. Netflix made a grave error and increased prices of its DVD service amid economical hardships. It could have just cut back on operations or reduced supply. But no, the attachment it had to the DVD-by-mail service was too strong. This later came to dig its grave; the grave that it still struggles to get out of today.

From this concise recapture, it shows that Netflix still needs to understand how to deal with consumers – especially so in a market where competitors rely on mistakes and agitated consumers. Investors have to be cautious.

Why is this so? Despite the fact that Netflix somewhat improved its performance in the outgoing quarter as compared to the previous quarter, there is a possibility that it could commit another costly error in the event that it reclaims its lost glory. Also the market conditions have changed. Apple's Apple TV and iTunes are becoming increasingly popular. Also, Google (GOOG) recently launched a rental service via the android market. Add to the list Amazon (AMZN) with its Amazon prime. While Amazon’s product lacks the rental service, it is synonymous with fast service delivery. Some of the biggest names in technology are coming in and Netflix will have a hard time filtering through the competition.

I wouldn’t want to add to the bulging list of extreme critics, so I will simply conclude by saying that Netflix is a sell.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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