Netflix: The GREATEST Head Fake?

Netflix (NASDAQ:NFLX), the world’s leading internet subscription service for movies and television shows, gave a new meaning to the Wall Street phrase “buy the rumor, sell the news.” The saying comes from the tendency of stocks trading higher into a big announcement and selling off shortly thereafter.

The California-based company has seen its fair amount of declines over the past year. Last July, Netflix announced a 60 percent price hike for its DVD and unlimited streaming plan in order to offset rising costs. Shares touched a fresh all time high of $304.79 the day after the announcement, but began a tremendous fall from grace immediately afterwards. The stock finished 2011 near $70, logging a 60 percent loss for the year.

Although Netflix was left for dead, shares received new life in what may become the biggest and costliest head fake of earnings season. On July 3, 2012, Neftlix CEO Reed Hasting posted on his Facebook (NASDAQ:FB) page, “Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!” The post made headlines and provided optimism for the most recent quarter. Before the post, Netflix traded at $68 a share, but surged to $85 by the following week.

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On Wednesday, investors fled Netflix in droves. Net income for the second quarter beat estimates, but plunged 91 percent to $6.2 million, compared to $68.2 million a year earlier. At the same time, revenue increased 12.8 percent to $889.2 million. However, the company continues to struggle with content costs. The total expense of revenues jumped 31 percent to $643 million, compared to $490 million in the same quarter last year. Furthermore, Netflix faces a seemingly endless amount of competition from the likes of Amazon (NASDAQ:AMZN), Dish Network (NASDAQ:DISH), Time Warner Cable (NYSE:TWC) and anyone else with content to provide. Earlier this year, Verizon (NYSE:VZ) and Coinstar (NASDAQ:CSTR) also announced a joint venture to start a video streaming service to compete with Netflix.

Shares of Netflix closed 25 percent lower on the latest financial results. In a market powered by rumors and headlines, it is still important for investors to heed the fundamentals, rather than an upbeat Facebook post. Netflix increased the number of domestic streaming subscribers by 530,000 in the quarter, but the number of DVD-only accounts dropped by 850,000. Going forward, the company will continue to face headwinds from rising costs and increased competition. In a letter to shareholders, Netflix even said the Olympics will “have a negative impact on Netflix viewing and sign-ups.” The company expects to be profitable in the third quarter, but predicts a “consolidated loss” in the fourth quarter due to growing pains overseas.

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