Why Does Wall Street Hate Netflix?

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Why Does Wall Street Hate Netflix?"If you have nothing nice to say, don't say anything at all" is a mantra that's alive and well on Wall Street. Analysts prefer to cover stocks for which their sentiment is bullish. Apple (AAPL), for example, is a market darling. A full 50 of the 55 major firms with published analysis on the tech giant have it as a "buy" or "strong buy" rating. This series looks at the few stocks about which Wall Street is generally bearish.

Everyone seemed to love Netflix (NFLX) just six months ago. The all-you-can-eat video service was a hit with couch potatoes, offering a cost-effective way to consume the latest releases on DVD and a growing catalog of digital content as streams.

These days Wall Street isn't feeling a whole lot of love for Netflix: Just 17% of the 35 established analysts tracking Netflix have it tagged with a "buy" or "strong buy" rating.

Fall From Grace

How did a dot-com darling become a dot-com dud?

Netflix's downfall has been well documented. First, the company alienated subscribers this past summer when it revealed that it would raise its monthly rates by as much as 60%.

Analysts originally loved the move, waxing bullish on the margin-widening potential of meatier subscription revenue. But Wall Street and CEO Reed Hastings underestimated the resistance. As a result of the price hike, which kicked in for active customers during their September billing cycle, Netflix closed out the third quarter with 800,000 fewer domestic subscribers than it had when the quarter began.

In a few weeks we'll get the full report on the company's fourth-quarter performance, but no one should be surprised if Netflix had another crummy quarter.

We also had the Qwikster fiasco. Just as investors were reeling from the harsh response to the price hike on subscribers to Netflix's dual plans -- those receiving optical discs and streaming video -- the California company announced it would be splitting its operations into two distinct websites. Netflix would remain the streaming hub, but folks renting DVDs and Blu-rays would be migrated over to Qwikster.

The already-tender subscribers were outraged. Why should they have to manage two independent queues on two different sites? Wasn't it bad enough that they were already paying more?

Subscribers who may have been on the fence likely bolted in droves at that point. Netflix did the right thing -- killing off Qwikster just three weeks after it was announced and before the operations were actually split in two -- but the damage was done.

Netflix's reputation went from golden to checkered. Analysts -- realizing that fewer incensed subscribers paying more wasn't going to be a very compelling model -- changed their bullish tune.

Netflix went from loved to loathed just like that.

Misunderstood Intentions

Netflix was never as evil as the subscribers taking a battering ram to the company's reputation may have made it seem.
Netflix was too good to be true at $9.99 a month for an unlimited DVD rental service with an expanding digital catalog that was proving to be expensive to maintain. Studios were demanding more money out of Netflix for stream licensing rights, and Netflix had been offering that at no additional cost to subscribers on unlimited DVD plans since 2007.

The plan seemed fair. Streaming was no longer supportable as a "free" bonus for DVD subscribers. Netflix chose to drop the monthly price of the unlimited DVD service to as little as $7.99, but customers wanting access to the growing streaming catalog across an equally growing array of devices would have to pay $7.99 a month as well. This leap -- from $9.99 to $15.98 a month -- is why folks began decrying the 60% hike, but in reality, customers who were fine with just DVDs were actually treated to a price cut.

Qwikster was a bad idea. It was indefensible and poorly thought out. However, Netflix's willingness to add video games to Qwikster -- something that was abandoned when the split was shelved -- was never rightfully applauded.

The Long Road to Redemption

Shares of Netflix would have to more than triple to regain their summertime highs, and that's unlikely to happen in the near term. Netflix is now bracing investors to expect a loss for all of 2012. Rolling out in the U.K. and Ireland earlier this month will naturally be a drag on profitability, but the company has conceded that its stateside business is also in a funk.

Let's face it: Wall Street isn't going to renew its love affair with Netflix until it begins turning a profit and starts growing its subscriber count again.

It won't be easy. Competition is brewing for Netflix in 2012. Amazon.com (AMZN) has been growing the number of streaming titles available to Amazon Prime shoppers, and unlike Netflix, it doesn't charge more for the perk. Coinstar's (CSTR) Redbox and even FiOS parent and wireless darling Verizon (VZ) have been reportedly linked to launching streaming smorgasbords later this year.

The one thing working in Netflix's favor is that it takes time and money to amass the kind of digital vault that the company has built over the years. Stability in Netflix's subscriber count should kick in as soon as this new quarter.

Analysts have every right to be skeptical. Netflix has packed a corporate lifetime's worth of boneheaded decisions into just a few months. However, Netflix did kick off 2012 with back-to-back weeks of hearty stock gains.

Someone's apparently ready to believe in Netflix. Wall Street will probably be the last to know.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Amazon.com, as well as creating a bull call spread position in Apple.



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21 Comments

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Sadie Heldberg

One of the reasons I liked Netflix was the low monthly price when the company decided to yank prices up by 60% I felt a bit betrayed. There had been so much advertising about getting great movies for a low monthly rate that it just felt wrong. Streaming is a big deal these days especially for individuals like me who have to travel for work as I do for Dish. The streaming service is a big benefit that is necessary in my eyes therefore; I decided to go elsewhere for my services. Blockbuster@ Home is comprehensive delivering movies and games to my, mailbox as well as streaming movies to my TV, computer, or iPad that I use the most. I need an internet connection and my DVR, which I already have with mu Dish service. When I signed up, I was able to try the service free for 3 months, which was cool but honestly $10 a month is nothing compared to what comes with the service. Netflix can have there bad decisions and new streaming ideas it’s not worth it anymore.

March 11 2012 at 5:35 PM Report abuse rate up rate down Reply
Robin

I don't like movies. I won't pay for them.

January 19 2012 at 1:57 AM Report abuse rate up rate down Reply
calarican

Wiki?

January 18 2012 at 9:02 PM Report abuse rate up rate down Reply
calarican

AOL - Digital Ghetto for HuffPosters and Home Turf for Ponzi Scammers.

January 18 2012 at 9:00 PM Report abuse rate up rate down Reply
yankees11090

Its because theyre business model is held hostage by the post office, and the ISP providers, simple enough, either one of those 2 commits to any drastic changes, and Netflix implodes

January 18 2012 at 8:19 PM Report abuse rate up rate down Reply
Jim

Because an idiot runs it!

January 18 2012 at 2:41 PM Report abuse rate up rate down Reply
linus922

A better question would be Why does AOL hate Netflix? This story is a rehash of everything that AOL has relentlessly pushed over the last year. Blah, blah, blah. How about some actual reporting and some new news???

January 18 2012 at 2:08 PM Report abuse +1 rate up rate down Reply
Angelo Quintara

For me it wasn't the added cost or the split between DVD and streaming, it was the unmitigated gall and arrogance of the moron running the outfit. I dropped DVD within a month of the price hike and unless Netflix produces a really good replacement for Starz's lost content I'll be ditching streaming too.

January 18 2012 at 1:34 PM Report abuse +1 rate up rate down Reply
1 reply to Angelo Quintara's comment
Bubba

Totally agree. I was a happy stockholder and customer, but there's only so much boneheadedness one can abide. A culture of disrespect for the customer is almost always top-down driven.

January 18 2012 at 2:39 PM Report abuse +1 rate up rate down Reply
hemipwr54

Why does Wall Street hate America ? Seems like it is always trying to bankrupt the average American by raising the cost of living .

January 18 2012 at 1:05 PM Report abuse +1 rate up rate down Reply
1 reply to hemipwr54's comment
george22552

I'm not a Wall St. investor in the least. I'm 60 yrs. old now but when I was 19 yrs. old I worked as a minor clerk for a local "Merrill Lynch" office and I distinctly remember hearing an obscure stock broker say one day : "I don't care what ANYBODY thinks of me ! Just give me the money ! " It was right then and there that I made sure to avoid THIS profession ! At the time I was going to college at night and I was taking courses to eventually become a Special Ed. teacher which I did for 30 yrs. So, it's not like I was contemplating a
"Wall St." profession ANYWAY - but that broker's comment confirmed it for me ! Bottom line : choose a profession you'll potentially enjoy since we're all "married" to the jobs we choose for the rest of whatever !

January 18 2012 at 6:33 PM Report abuse +1 rate up rate down Reply
S

Isn't it funny how all this happens right in the middle of the MPAA and RIAA's war with the internet? Do you really think it's a coincidence that Wall Street has turned its back on Netflix just now, instead of in 2008 or 2009 or 2010? The hypocritical blood-suckers behind SOPA and PIPA would LOVE to see Netflix disappear. Don't blame it all on the subscribers (who basically just had a toddler tantrum). There's more to this than a minority (800K out of 25M - do the math) of subscribers taking their ball and going home in a huff.

January 18 2012 at 12:59 PM Report abuse +1 rate up rate down Reply