Is Netflix’s Company Stuck in Arrested Development?
By the looks of how things are going for Netflix Inc (NASDAQ:NFLX) lately, the firm once known as a leading innovator in how consumers rent and watch videos is suffering from a case of arrested development.
The latest in almost five months worth of bad programming decisions came this week, when Netflix revealed that it intends to raise $400 million in capital by selling equal amounts of its stock and debt. This, in and of itself, might not have been a big deal; companies often hold secondary offerings of stock to obtain cash for acquisitions or expansion efforts.
Netflix also says it’s moving into the U.K. next year. Anyone watching the exchange rate of the U.S. dollar against the British pound knows that venture isn’t going to come cheap, or be easy.
“Netflix may be able to launch more quickly in these regions by leveraging its core technology and experience generated in the U.S.,” said Jeff Rath, of Canaccord Genuity. “[But] it lacks brand awareness, and in the U.K. in particular, faces much more substantial competition from Amazon,” as well as the BBC and BSkyB.
Rath’s comments came as he resumed coverage of Netflix (NASDAQ:NFLX) with a sell rating and $60-a-share target price. On Tuesday, the stock closed down more than 5% at about $70.45.
But it was a line in the company’s latest filing with the Securities and Exchange Commission that added even more to investors’ concerns about the state of Netflix’s future development.
“If 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,” Netflix acknowledged. The company also said that it expects “to incur consolidated net losses for the year ending Dec. 31, 2012.”
Reaction to that rattled Netflix’s stock Tuesday, this on top of the nearly 76% drop the shares have suffered since hitting an all-time high of $304.79 on July 13.
It’s no secret what is putting the cuffs on Netflix’s performance of late, and is going to hamstring it next year. It’s losing customers, and revenue sources, as a result of a stream of bad business decisions that critics say violated what should be Rule No. 1 of any business: Don’t Make Your Customers Angry. Implementing the equivalent of a 60% price increase, followed by a unpopular, confusing, and then ultimately scrapped effort to split into two businesses, will do that.
Those events are in the past, however. And, yet, Netflix can’t even find some relief there.
“Investors need to ask why one of the largest subscription-based platforms in the world needs capital,” said Janney Capital Markets analyst Tony Wible about Netflix’s stock-and-debt sale. “The lack of profitability on almost 23 million global streaming subscribers suggests that this business may not be as lucrative as the bulls believe.”
Wible certainly has his doubts, as he has a sell rating and put a “fair-value” estimate of Netflix’s stock at $49 to $51 a share.
Views like that show that not only has Netflix’s development been arrested, but next year could be when it actually retreats.
This is a guest post by Rex Crum at MarketWatch.