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Netflix falls 14% on "thoughtless" investor panic

By PETER WHITE

Published: 16 September, 2011

READ MORE: Financial

A Netflix guidance note to investors has them concerned that the entire shooting match is tumbling to the floor. It's no longer a growth stock and that's all they were interested in. The note appears to say that in the US Netflix will lose 1 million subscribers this quarter, after it almost doubled some of its pricing.

In the full version of this story (email peter@rethinkresearch.biz for a copy of Faultline) we carry two diagrams, the first which shows what Netflix thought would happen to customer mix when it announced them in July and the second adjusted for what the company has experienced. Most customers were due to either let the price rises go ahead or cancel by September 1, rather than pay their first month at the new rates.

Netflix has actually lost just half a million customers, or 4% of its customers. How many businesses would not double pricing if it only lost them 4% of their customers? But in revenue terms the result should be a rise of around 11% to 12%, a bigger quarterly rise than any previous quarter - we calculate it should be up something like $92 million if the new set of numbers are right. Sure it's costs will have also gone up, but that's because it is launching in 43 more countries and planning a European launch.

Latin American revenues will begin to hit fully in the fourth quarter and two quarters later European revenues will cut in, while Domestic revenues may suffer a quarter or two of further disruption as people belatedly drop out of the DVD rental side of the business, and then that too should go back into solid growth. We have a feeling that both Latin America and Europe are going to lap this up. Even Canada added 1 million subs in 6 months.

If that result is anything like correct, the share price will at first bounce back, but later as people re-forecast future revenues at that rate, will climb even higher. Investors are fickle.

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