The stock price fell 4.6% to $431.09 even though the Q2 earnings reported last night were largely in line with analyst expectations, subscriptions were up impressively, and management forecasts were upbeat. What gives?
The simplest explanation is that Netflix always is susceptible to downturns because its shares are so expensive, reflecting investor optimism about its prospects. They trade for about 128 times the company’s earnings — a stark contrast to more stable media giants such as Fox, Comcast, Time Warner and CBS whose stock prices equal about 20 times earnings.
And Netflix bears found some reasons to be skittish. The company will have to boost spending to secure the content it will need to serve new markets including Germany, France, Austria, Switzerland, Belgium, and Luxembourg — and that could put pressure on earnings “as soon as next year,” says Wedbush Securities’ Michael Pachter. He’s concerned about the decline in DVD-by-mail rental subscribers; they account for “half of all operating profit for the company.” The analyst also says that Amazon’s recent streaming deal with HBO suggests that “a stand-alone subscription plan is coming” that would make the e-retailer a more potent video competitor.