After Netflix' stock price plunged upon a double dose of bad news -- a shortfall in subscriber growth coupled with a new competing streaming service announced by HBO -- investors were left asking, is Netflix down for the count?
Netflix received a one-two punch on Oct. 15. First, HBO announced a competing streaming service to begin next year. Then, Netflix announced a significant shortfall in subscriber growth compared with its forecasts. As a result, the stock price dropped precipitously and the company lost a full quarter of its value as some investors wondered if the service can survive.
Netflix famously started when its founder and CEO Reed Hastings racked up over $40 in video rental late fees. Hastings brainstormed the idea of a rental service by mail where, for a flat monthly fee, the user could keep the movies as long as they liked with no late fees. The service took off, effectively killing the huge Blockbuster video rental chain in the process.
Rather than resting on its laurels, Hastings and Netflix saw the real future delivery of video content was through streaming. After spinning off the original business model, the DVD rental service, into the ill-fated Qwikster, Netflix morphed into the worlds largest video streaming service. Now, 87 percent of its revenue comes from streaming movies and TV shows. More recently, Netflix began producing its own content, such as "Lilyhammer" and the acclaimed series "Orange Is The New Black."
Now that HBO has announced its intent to compete in the streaming area in 2015, and subscriber growth has failed to meet forecasts, it looks like investors are running for the hills, but a closer look shows that the outlook for Netflix may not be so bleak. For one thing, the announcement was made on a very volatile day in the market, where technology issues were particularly at risk for sell offs on bad news. Also, Netflix has long been the subject of speculative investing, making its stock particularly volatile. In 2011, when the company announced its price hikes, the stock famously lost 80 percent of its value.
Top analyst Mark Mahaney, who likes the stock at this price and has rated it "outperform," is confident in Netflix's future: "We think the package, the offering, from Netflix each year gets better and better for consumers, and more consumers will sign up for it. And you still have major secular trends behind the company."
Mahaney points out that the recently announced shortfall applies to new subscribers as opposed to current subscribers bailing on the service. "If you think the subs are going to decline from here going forward, you don't buy the stock. If you think they can't get close to 50 million subs within two or three years, you don't buy the stock," he said. "We think they can."
Mahaney also notes that the increased use of tablets as well as more TVs with built-in Internet are favorable for the company's growth prospects. Other pundits also believe that HBO's new entry will hurt the other pay channels more, and even cannibalize HBOs own pay cable service, as opposed to affecting Netflix.