Netflix (NFLX) has dropped nearly 40% in less than a week since cutting its third-quarter subscriber guidance. But if you think it's bottomed, you had better think again. Why?
Well, we all know about the company's current challenges.
1) Everybody hates the split of the brand into Netflix and Qwikster.
2) Dish Network (DISH) is about to unveil a Blockbuster-branded video-streaming service.
3) Amazon.com's (AMZN) upcoming Kindle tablet will reportedly include free access to the company's Instant Video service.
But there's another problem just over the horizon - Netflix will almost certainly be cutting its fourth-quarter guidance when it delivers its third-quarter earnings report.
On July 25th, Netflix reported second-quarter earnings. At that time, the company expected a weak third quarter before bouncing back strongly in Q4. The supposedly-temporary culprit was the price increases announced on July 12.
In fact, Netflix went so far as to claim that Q4 would be its "first billion dollar global revenue quarter."
At that time, the consensus revenue forecast for Q4 was $923 million, so the company was actually significantly raising expectations.
And where is it now? $962 million, just a hair below the $970 million Wall Street was expecting before the company cut subscriber guidance last Thursday.
We know now that Netflix' management team dramatically underestimated the impact its price increases would have during Q3. So is it not safe to say that it make a huge goof on July 25th by predicting $1 billion in revenue for Q4?
Remember, the three challenges I mentioned above - outrage at the Netflix/Qwikster split, Dish's streaming service, and Amazon's free video service - have all materialized after that billion-dollar prediction.
And since Wall Street hasn't significantly cut Q4 estimates for Netflix, there is simpl a ton of room for guidance to come in sharply lower.
Mark my words, Netflix will not only have to recant that $1 billion forecast, but also issue a fourth-quarter forecast that is well-below Wall Street's $962 million consensus.
Interested in bottom fishing? I'd look elsewhere.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
