Netflix CEO Reed Hastings had better hope that consumers are more forgiving than Wall Street. The company’s shares fell 7.4% on Monday following Hastings’ mea culpa for botching the roll out of Netflix’s decision in July to separate its streaming business from DVD rentals — he tried to gloss over the fact that it would raise prices by 60% for half of his customers, who want both. He also disclosed today that DVDs will be handled by a new stand-alone unit called Qwikster that will begin to rent games for XBox 360, PlayStation 3, and Wii consoles. Netflix’ closing price of $143.75 is about half of what it was just before the July announcement, and down $64.96 from last Wednesday before the company said that its subscriber numbers for 3Q would be lower than it had forecast.
Savvy company watchers say they believe Hastings is scrambling to fix Netflix’ image because its board or large investors — or perhaps both — are becoming panicked. They have a lot riding on the belief that Netflix will remain the Internet’s leading alternative to cable TV and soar as broadband video becomes ubiquitous. Even after the recent drop in value, Netflix stock trades for an extraordinary 21 times expected earnings — nearly twice the multiple for most media companies. That means most of its value comes from investors’ faith that Netflix will become far more profitable than it is now.
But Hastings’ PR blunder raises questions about his tactical skills just as the Netflix story is becoming less credible. Goldman Sachs’ Ingrid Chung, who’s a fan of the company, says that Netflix could face tough competition if Amazon buys Hulu — or if Dish Network succeeds with its plan to create a compelling streaming service under the Blockbuster brand. Meanwhile, Janney Capital Markets’ Tony Wible, who has a “sell” recommendation on Netflix, says the company’s fortunes could fall as broadband providers switch to usage based pricing. He’s also unimpressed with Qwickster’s plan to rent video games: It’s hard to predict potential hits, and games are expensive to keep in stock, making this “a quick way to lose money.” The key for Netflix, says BTIG’s Rich Greenfield, “will now be regaining positive ‘word-of-mouth’ momentum among it subscriber base.” But Hastings’ apology, he adds, “is not going to get consumers to rave again about Netflix.”
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