Netflix Tumbles After Hours on Dreary Q4 Outlook

Joel Anderson |

Netflix (NFLX) released better than expected earning for Q3, but earnings projections for the current quarter were much lower than analyst predictions while subscriber loss was higher than expected.  All told, the earnings report sent Netflix stock into a free-fall in after hours trading, losing over 25 percent of its value.

Earnings Up, But Subscribers Down

Netflix reported Q3 earnings per share of $1.16, beating analysts projections of $0.95 EPS.  They increased revenue year-by-year by 49 percent on the quarter, reaching $822 million and beating consensus estimations of $812 million.  However, Netlflix reported the loss of 800,000 subscribers, the first quarter where they registered a contraction in customers and exceeding the loss of 600,000 that Netflix anticipated in a forecast released in September.  That, combined with dreary guidance for the fourth quarter prompted a sell-off of Netflix stock in after hours trading that saw shares hit a low of $85.

Long-Term Outlook Not Rosy

Netflix projected current quarter earnings per share to be between $0.36 and $0.70 on revenues of $841 million to $875 million, much lower than analyst expectations of $1.08 EPS on $920 million in revenue.  While the company announced plans to expand their video-streaming services into Ireland and Great Britain where it will compete with Amazon's (AMZN) popular LoveFilm service, Netflix video steaming services face increased costs in the future that threaten the company's profitability.  Netflix intends to double their spending on content in 2012, matching estimated increases for Time Warner Inc.'s (TWX) HBO unit, a move that should hurt profitability in the future.

Major Missteps Lead to Awful Quarter

Shares of Netflix were at an all-time high in July, peaking at a share price of almost $305.00.  However, news that they would be changing their fee structure to reflect the new emphasis on streaming video was met with universal anger from consumers because it would raise prices by 60 percent for the same services.  That combined with an abortive effort to create the separate Qwikster service to handle DVDs resulted in an exodus of customers and a massive sell off of Netflix stock after the Sept. 15 launch of the new system.  By end of day Monday, Netflix had lost over 60 percent of its value since July, a trend that continued in earnest in after hours trading.  Netflix executives remain confident, though, that their strategy of focusing on expanding their streaming video services will succeed in the long run with CEO Reed Hastings and CFO David Wells stating in a Monday letter to shareholders "We continue to be well positioned to succeed in the large global market for streaming video.  Consumer demand for unlimited on-demand movies and TV shows streamed over the internet keeps growing driven by increased broadband penetration, the adoption of Smart TVs, and increased video consumption from laptops, tablets, and phones."

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Companies

Symbol Name Price Change % Volume
AMZN Amazon.com Inc. 838.60 9.55 1.15 2,138,900
NFLX Netflix Inc. 98.98 2.31 2.39 5,530,403
TVIZ VelocityShares Daily 2x VIX Medium-Term ETN 8.85 -0.24 -2.64 7,277
TWX Time Warner Inc. New 79.74 1.13 1.44 1,384,040

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