The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
phenomenal slide that started a few months back continued after its earnings on Monday when the company lost more than $2 billion in market capitalization in a single day, owing to its dismal results and discouraging near-term outlook.
We have reviewed our pricing model in light of the new information from this announcement and revised our price estimate to $142 from $195. Netflix's own bad decisions are now providing a window of opportunity for competitors such as
Blockbuster to gain market share.
We have lowered our subscriber forecasts for its U.S. and international businesses and have updated our content costs assumptions in our updates. Despite the lowered forecast, we think that the growth prospects for Netflix longer term are still compelling and, in particular, we believe the international business provides substantial room for growth.
The international business accounts for just under 30% of its stock value by our analysis, and we believe the market is currently under appreciating its international business given how new it is.
, implies a premium of about 80% to the market price.
See our full analysis for Netflix
Code for "Netflix's US Subscribers" chart:
Reduced Subscriber Growth Expectations
We have reduced both domestic and international subscriber gain expectations. After its recent stumbles, we expect Netflix to return to positive subscriber growth in 2012, albeit at lower growth rate than we have seen previously. The damaged brand image and higher prices are likely to suppress the domestic subscriber additions for awhile.
Although Netflix is improving its streaming content, we think that it still may not be enough to lure enough subscribers and hybrid service (streaming+dvd) might be a bit expensive for some potential customers. Furthermore, the competitors are likely to use this opportunity to boost their streaming content and attract customers with promotions to gain scale.
We have also reduced our international subscriber growth expectations. Netflix's free international subscribers increased disproportionately in the third quarter of 2011 due to its launch in Latin America. While this was expected, the magnitude of its increase in free subscribers relative to paid subscribers was higher than what we saw for Canada.
We think that many of these Latin American customers are just trying out Netflix during the free trial period but may not convert to a paid subscription later. Several households lack online payment tools such as credit cards, and we believe that $7.99 a month might be expensive for many Latin American households.
Although Netflix is launching in the U.K. next year, it may not be an easy market to tap into due to existing players such as Lovefilm and video service providers locking up good content.
Rising Content Costs
We expect a huge jump in content acquisition costs as a percentage of revenues in 2012 as Netflix will be very aggressive in content spending for its U.K. expansion and as part of its efforts to mend strained customer relations in the U.S.
In 2013, we expect this figure to come down, but in the long term, we have slightly increased are expectations for content costs. Netflix has stated clearly that it plans to acquire more exclusive content, and that may include new shows as well. Exclusivity demands a higher price and so this could weigh on the cost structure going forward.
Nevertheless, we believe that the stock should pick up next year once the U.S. business stabilizes and as the company starts to gain from its large investments in content and international expansion. In 2012, the company expects some losses, at least in the first half, in part due to its expansion in the U.K. It looks like Netflix has realized that it was moving too fast, and this realization should help it take steps to correct the mistakes that it has made recently.
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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.