Philadelphia, Pennsylvania – (StockNewsDesk) – 10/17/2014 — In its third quarter earnings report, Netflix met analysts’ expectations, but the stock plunged as investors were spooked with concerns about slowing subscriber growth.
Momentum Stocks under Pressure
High growth, high multiple stocks, like Netflix, have been leading the stock market higher since March 2009. In that period, Netflix has climbed nearly 18,000% since the start of the bull market. The company has become a dominant fixture in American households, with subscribers in nearly 1 in 9 American households.
Similar companies, like Netflix, have met selling pressure on better than expected earnings, a testament to the change in market conditions. This is a period of risk contraction, where multiples are coming in, as investors’ optimism is shaken. In this scenario, the most vulnerable companies are the biggest gainers and those with lofty valuations. Netflix fits both of those descriptions.
Victim of Its Own Success
One recent issue for Netflix is that its success has attracted other competitors in the space, such as Hulu, HBO, Showtime, and Amazon. In turn, this is making the cost of content go higher. Additionally, movie studios and other content creators are charging higher prices, as well, as they see all the money Netflix is making from their creations. At one time, revenue from Netflix was seen by the studios as simply extra money.
However, now with theater revenue plunging and DVD sales dropping, they are quickly accepting the fact that streaming online is the place to recoup these lost revenues. Netflix has responded to these threats, proactively, by initiating its own content creation, using its proprietary customer data. So far, this approach has been a wild success.
Yet, investors are not as thrilled with these developments, because Netflix is no longer a technology company, deserving of a rich valuation, in the hopes that it will revolutionize content consumption habits, which it was perceived by the market for some time. Instead, it is looking more and more like a traditional television network. With its growth slowing, many are expecting its valuation to show this new status quo.
Third quarter earnings came in at 96 cents per share, with revenue of $1.2 billion. Subscriber growth came in at 3 million with most coming from overseas. Another concern going forward is that with more competition coming in, Netflix’s power to raise prices is going to be compromised. Going forward, this will continue to put downward pressure on Netflix’s margins.
The company’s stock opened 26% lower, at 332.73, before gaining a bit back to close at 361.70. Forecasts for the next quarter were mostly in line with subscriber growth expected to be 4 million. Even with this cut in price, Netflix remains priced as a growth stock. The competitive pressure will certainly affect its pricing power, while the cost of content continues to increase.