Throughout the day on Thursday several stocks experienced major gains and losses. These stocks were driven by company news that could impact both their short- and long-term future. Below is a look at 5 companies that released news on Thursday and experienced strong movement, along with my opinions regarding the direction of these stocks as they relate to this news.
Netflix, Inc (NASDAQ:NFLX) may have released the most damaging news of any individual company during the day on Thursday. Netflix announced that it expects 24 million subscribers after rising prices angered customers. The 3rd quarter projections have been revised to 24 million subscribers which is 1 million less than NFLX had anticipated.
The stock has lost more than 40% of its value since announcing its new prices in July. I believe that a 40% loss is quite excessive, considering a change that was inevitable to operate at a high level. The company is projecting 24 million subscribers rather than 25 million, and since the stock was not trading with positive momentum I believe that a 18% loss is somewhat extreme. Now, I am not an accountant, nor do I know the percentages of Netflix customers who have one service versus both services, but from what I can figure this news is not so bad.
Before Netflix increased the prices of its service the price was $9.99 for unlimited-streaming and DVD-by-mail. The company now charges $7.99 for one service or $15.98 for both services. As I said, I do not know what percentage of the company's consumer base that will use both services versus only one service, therefore I will speculate by using a number that I believe could be close. I am going to use 20% as the base number for subscribers that use both services; it may be a little high or it may be a little low but I believe it's possible. At 20% of 24 million customers Netflix would earn $76.7 million with the additional 80% contributing $153.4 million in revenue per month. These two numbers would equal $230.1 million per month or $690.3 million per quarter.
Now, these numbers are not to be taken literally; it's simply an example of how fewer customers with higher prices are not necessarily a negative development. In addition, the company's margins should be much better since the company has to pay for stamps, lost products, and 100's of employees to sort through all the DVD's that get shipped out and returned everyday. I believe the increase in price was necessary; the company has most likely trimmed its mail-order customer base and is now earning more profits as a result of the change. I am encouraged by 24 million subscribers because I expected it to be much worse. I do not believe the subscription base will be an immediate issue with this company.
I place more emphasis on its failure to secure a deal with Starz and its future with Viacom than I do with the amount of current subscribers. The company may be trying to cut down on its cost of obligations, but in the process could hurt its long-term future. However, the long-term future is unknown, the only current issue is the actual percentage, not my pretend percentage, of subscribers that purchase both plans. This number will tell us what the most likely scenario is for this company and its potential stock price in the coming months. The company has long-term issues it must worry about, which include future competition from Apple TV and Google TV, but as of this day Netflix still controls its market and retains a high number of subscribers.
I believe the company could very well outperform future expectations, and with a stock that is trending lower, I believe it's presenting a particularly good situation. However, I am not sold on its future -- there are simply too many questions and not enough answers.
The company announced the drug Qnexa will be resubmitted by the end of next month. An advisory meeting will then be held sometime during Q1 of 2012. I find these developments somewhat odd since the drug was delayed in January and the company is yet to complete its study, Fortress, which looks at the potential for birth defects as a result of taking the drug.
I am skeptical of Qnexa gaining approval in the near future because it's yet to complete the study and regardless if there is an additional label on the drug I don't see the FDA approving a drug with questions regarding child birth. I believe the FDA will state that it wants to see the results from the study before granting an approval for verification. However, I do believe that Qnexa will be granted approval at some point in the future, just not the immediate future. The FDA is very tough on weight-loss intended medications, and I don't see any reason why the FDA would grant VVUS approval without seeing all relevant studies. The drug works and is sure to be a success, the market is huge for a medication of this magnitude, I just believe the wait will be a little longer.
I believe the chances of this being "stupidity" or "fat fingers" are very unlikely. I am curious to see what develops over the next few weeks, because I don't understand how $2 billion could be lost without notice. Even the most successful money managers in the world are viewed under a microscope when they work for large corporations and have access to billions of dollars. If this act was intentional then it goes down in history as one of the largest losses as a result of unauthorized selling, and I believe it could give a clear indication of management's disconnect, more trouble within the company, or other people's involvement. I view this as a sign of trouble for the financial institution, and while I am not here to point out conspiracy theories, I would not be surprised if there are reports of more loss or trouble within the company that shareholders did not know existed.
The details are unknown; all we know is what we have been told, and rest assure dan investigation is going to occur. I believe shareholders will not like what they hear -- it's simply too much money, and there has to be more to the story than what we know. In addition to this mind-boggling development, the company expects to post a loss during this quarter, and offers this action as a reason to the loss.
During the last quarter the company's net income was cut in half compared to its year-over-year earnings. The company was attempting to perform damage control by cutting 3,500 jobs, which was announced last month, which is expected to save the company $2.5 billion in 2013. At this time I can not find any reason to purchase this stock, there appears to be too many issues and I fear what could be ahead. The stock has lost nearly 80% during the last 5 years and I wouldn't be surprised to see that number increase.
Transcept Pharmaceuticals (TSPT) closed on Thursday with a gain of nearly 80% after the company announced its plan to resubmit Intermezzo to the FDA for approval.
This company has attempted to get its insomnia drug approved for many years, and I feel like the company is now close to achieving its long-term goal. Furthermore, I believe the product could be very successful, as millions of people experience the symptoms that Intermezzo treats. The drug is intended to treat insomnia, as needed, when a patient is awakened in the middle of night and is unable to return to sleep.
The company was trading at $11.00 a share before the FDA rejected its drug in July. So I believe it's possible the stock could see gains in the future as the date gets closer. However, it's been denied several times in the past and although the FDA's request seems achievable the stock does present danger of loss, as with any small cap biotech company. I believe it offers a good opportunity, but I would be cautious and make sure that research is performed if you're considering purchasing this stock.
Research in Motion (RIMM) is trading with an afterhours loss of 18.5% after announcing disappointing earnings.
The company announced revenue of $419 million, which was down from $796.7 million year-over-year. The company's EPS also slipped from $1.46 down to $0.80 for the last quarter. The company's earnings further show its struggle to compete with the iPhone and Android operating system. The BlackBerry doesn't have the edge it once had, and while other companies are evolving and creating better products, RIMM always appears to be one step behind as it refuses to reinvent its brand.
The company is placing all its eggs in one basket with its QNX technology, which the company hopes can compete with the likes of Apple and HTC. The company's playbooks were a disappointment as well with most believing that the company did not capitalize on the demand and released the product much too late. I believe the company has a chance to reinvent itself but it must create something different. The company has no long-term debt and has a large amount of cash, therefore it's in a better situation than Apple was in the 1990s when it was forced to develop a new product. I believe that RIMM must attempt a similar change and turn away from the BlackBerry devices and create something new and different that can control the technology market.
At one time RIMM was the fastest-growing company in the market and controlled the handset industry with its technology. But unfortunately its time has run out, and the company must make significant changes if it wishes to remain relevant for the next 10 years. I believe the company is capable of this level of change, it's proven that it can be transcendent, but it will take time and patience on behalf of investors. I give RIMM as good a chance as any other technology company. It's impossible to know which company will control the market in 10 years, but with Research in Motion's patents, balance sheet, and management, it's very possible that RIMM could be the company that rebounds stronger than ever.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.