Yesterday Netflix (NFLX) announced an estimated 24 million subscribers down from 25 million. This news was met with a nearly 19% loss in one day! This is bad news for NFLX, growth will not meet the high expectations of analysts this quarter. But a 19% drop? This screams overselling. Over the past 4 quarters NFLX has lost over 8.7 million subscribers. Yes, you read correctly - 8.7 million. But in the same timeframe they gained 18.3 million subscribers for a net gain of about 9.6 million subscribers.
I estimate NFLX to have a 6.78% subscriber churn for the current quarter. Not good, but slightly better than the early 2000’s. This comes to a loss of about 5 million subscribers this quarter, however I also expect NFLX to gain about 4.5 million subscribers. This leaves NFLX with a net 24 million subscribers. After this quarter, numbers should normalize and growth should resume.
The big reason I’m not concerned about this loss, is that for nearly everyone who left, someone else signed up for the service despite having higher prices. Think of this as NFLX shaking out the weak hands. Now that those people are gone, the remaining subscribers should be much less prone to price movements. By Q1 2012, I suspect NFLX’s churn will drop significantly from this move, to perhaps 3% or so.
White line separates actual from projected subscribers gained and lost.
White line separates actual from projected total subscribers when projected numbers from above are applied.
It might take a few months for the share price to rebound so now might not be the best time to buy in. On the other hand, people are taking this news far worse than it truly is. I have no intentions of opening a NFLX position yet, but I am starting a search for a good entry point.
Bottom Line: If you’re going to sell NFLX, don’t do it because they post one quarter of poor subscriber growth.
Research in Motion (RIMM)
I fully expected RIMM's release yesterday to be poor, but I had no idea how poor it would be. RIMM missed in just about every category there is to miss in. Long term investors should look deep into RIMM to see if this is still a buy and hold stock. Here is a peek at yesterday's numbers:
Comparing 2011 Q2 to 2010 Q2:
- Net Income dropped by 58.7%
- EPS dropped by 56.8%
- Revenue dropped by 10%
- Phone sales dropped by 12.4%
And the nail in the coffin – PlayBook sales dropped from 500,000 to 200,000 in a single quarter.
Definitely not pretty, and I don’t see a light at the end of the tunnel. At only 200,000 units sold, PlayBook looks to become a non player shortly. For phones, Apple (AAPL) has the high end phone market covered, and is quickly taking more sales there, while Android (GOOG) is mopping up everywhere else. RIMM still holds a decent chunk of the smart phone market (24% according to a Pew survey), but that number will only dwindle as both AAPL and GOOD pick up more and more sales each quarter. RIMM can’t afford any misstep, let alone the abysmal Q2 it just posted. Unless RIMM does something right now to take back market share, it’s only worth $15 per share.
Conclusion: Both RIMM and NFLX are having some trouble right now, but RIMM’s problems seem to be mounting, while NFLX’s appear to be temporary. Look for both stocks to be turbulent over the next quarter with both initially trending lower. However, NFLX should recover as investors realize this was a blip in subscriber growth, rather than the start of a new trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.