Netflix: Why the Disappointment?

Posted by: Cliff Edwards on April 24, 2009

Is Netflix too succesful for its own good?

That certainly seems to the view of investors after the mail-order movie rental company reported boffo earnings today, including record subscriber growth and a 70% surge in profits. Netflix stock, under pressure all day on profit-taking, dropped an additional 6% to $42.25 a share in after-hours trading.

The prevailing wisdom? The company should have done better.

To recap, Los Gatos, Calif.-based Netflix said it earned $22.4 million, or 37 cents a share, compared with a profit of $13.3 million, or 21 cents a share a year ago. Revenue rose 21% to $394.1 million. Analysts were expecting a profit of 33 cents a share, excluding stock-based compensation, on $391.1 million in revenue.

The company continues its strong momentum. Netflix ended the quarter with about 10.3 million subscribers. For the second quarter ending in June, Netflix expects revenue of $403 million to $409 million and a total of 10.4 million to 10.6 million subscribers. And the actual cost of acquiring subscribers fell to $25.79 from nearly $30 a year ago.

No doubt the sharp drop in Netflix stock can be attributed to the heady share gains logged so far this year.

But here’s another reason investors are getting a little skittish: Redbox, a movie kiosk operator with units in supermarkets, Wal-Mart and other places is becoming more of a competitor. The company says business is so strong that itis planning to expand from 12,900 kiosks to 20,000 by the end of the year. It’s movies rent for $1 a day.

I wonder if those concerns are much ado about nothing. Seems to me Redbox competes more with Blockbuster than Netflix (though both require choosing movies online). With Redbox, you still have to jump into a car to go to a kiosk, while Netflix caters to people who want the movie delivered right to the door—often in as little as a day.

Further, Netflix distinguishes itself with a massive catalog of titles, the ability to rent Blu-ray high-definition titles and streaming to computers, TiVos, Roku players and other devices.

Netflix certainly has a lot of competition, particularly in the streaming-media category, but for now it looks like it will remain far and away the undisputed king of physical movie rentals.

Reader Comments

gerrrg

April 27, 2009 3:57 AM

I don't place much concerns about kiosk rentals at all. It is in fact the retail rental chain store that is threatened to be split between kiosks and Netflix.
_____

The reality is that it's hard to justify that 32 p/e, and the forward p/e is just at 20. Along with the 1-year price targets set at $40, the price would continue to drop, don't you think?

murfields@cox.net

April 27, 2009 1:56 PM

After three years with Netflix I am ready for RedBox(4 locations with-in 3 miles). I have in first place Australia for 2 months, 3 weeks for The Wrestler and Frost/Nixon and am being sent 6,7,and 8 choices. There excuse is they are in demand. Netflix service is getting worse. Anyone experiencing a wait period with RedBox?

Jammer

April 27, 2009 2:19 PM

Netflix has a lot to contend with. They will always rule the DVD by mail business. My concern is in Blu-ray (a lot of problems with cracked discs and nobody likes the fee increase) and streaming. I sense a price increase in Netflix streaming soon, especially if they up the quality to HD for most movies. They don't have the technology to do it right now, but they need to. I've seen Netflix streams compared to VUDU (another streaming service) streams and the quality is so much higher on VUDU.

Specialization in the streaming medium will raise Netflix prices, and consumers will back off.

chammond

April 27, 2009 3:41 PM

Mursfields, you are exactly right! Netflix is getting worse... I cannot even get close to a new release movie all of a sudden... My que looks like this.
long wait...
very long wait...
long wait...
Pictures of Uncle Buddy... Available
lol.

Art

April 27, 2009 5:33 PM

I am still very bullish on the financial prospects for Netflix.

As far as delays in shipment, the only one I have ever had was for last year's academy award winner, Slumdog Millionaire. I had it on my queue the day it came out and was told there would be a long wait. Three weeks later it was in my hand. Not too bad. I received Frost/Nixon the day after I moved it to number 1 on my queue.

Netflix is a well-run company that reminds me of the first few years of AOL. Let's hope they don't decide to sell out or I will sell my stock immediately.

Gerald

April 27, 2009 6:19 PM

Netflix and Redbox aren't really in the same business. Netflix is for people who really like films or really like older or unusual films, are willing to sit and build a queue and wait for the films to appear. Redbox is impulse - hey let's watch something tonight, or you're leaving the market and decide to get a movie. It's like pay per view. Let's not forget that late fees are what got people so p'ed off at Blockbuster. That, and having to schlep back and forth to a B&M store. As more people use Redbox and discover that the great advertised price only exists if you rush the film back in time, they will become disenchanted.

Sharon

April 28, 2009 12:05 AM

I only tried to use Redbox once and the one was out of order and the other one didn't have the same movie. I used to have Netflix and will sign up again. I never had a problem with getting any movies in my que. I only cancelled my subscription with them because I lost my job. With Redbox you only get what is available and have to return it back to a Redbox. The two near me arn't that close, so I'll choose the mail/online viewing.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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