Netflix Is No Apple Pie

If you had Netflix stock in early July, congratulations. If you still have it, I’m sorry. It’s like baking an apple pie and having two-thirds of it fall out of the pan and onto the floor. Only in that case, you can go buy some more crust – and hopefully you’re not too far removed from apple season to get some good fruit.

Not long ago, Netflix seemed as American as apple pie. But America is fickle: It likes a winner. And a winner, these days, Netflix is not. The OTT provider’s stock price fell another $3 on Tuesday, closing at just over $108 per share. That would be a fantastic number for many companies, but considering the video giant briefly crossed the $300 barrier just three months ago, it’s not good. It hasn’t been this low since June 2010.

While the whole market’s been struggling over the past three months, Netflix should look in the mirror and blame itself. In July, the company raised raise monthly rates on its DVD+streaming video plan – not in itself disastrous – but the message it delivered to its subscribers was more business-speak than good PR:

“Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn’t anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members," the company wrote. “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs."

This “realization" was just the first of many for Netflix since July. Just last month, CEO Reed Hastings apologized, acknowledging that he “slid into arrogance based upon past success" and that the company has “done very well for a long time by steadily improving our service without doing much CEO communication …" That would’ve been the first step toward reconciliation with his customers if it had not been accompanied by the disastrous plan to separate its DVD and streaming video services into two companies. It only took a few days for Hastings to “realize" that was a horrible idea that made “Qwikster," the new name for the DVD business, a laughingstock, even parodied by Saturday Night Live in a sketch that wound up getting cut from the show. You can view it here. Qwikster lasted about as long as, well, a bunch of apples sitting out in the hot summer sun. Maybe it’s time Hastings stepped aside so someone else could “realize" some success rather than past mistakes.

The stock has sunk so low that, despite the company’s problems, some analysts are actually upgrading it. Daniel Ernst of Hudson Square Research, for instance, raised his rating on Netflix from “sell" to hold." And an investor note from Andy Hargreaves of Pacific Crest, quoted by Barron’s, says the risk/reward ratio for Netflix is still positive, as the company retains “significant advantages" over its competitors. Hargreaves thinks Netflix could increase its number of subscribers from roughly 23 million today to 62 million in just five years.

But not everyone is so high on Netflix’s lows. Analyst Michael Pachter of Wedbush Securities this week downgraded Netflix stock because he thinks it will be tougher to sell its streaming service now that DVDs have once again joined streaming under one umbrella. And despite his optimism, the aforementioned Hargreaves cut his 2012 subscriber estimates for the company, acknowledging that Netflix has been hit by “brand damage." No kidding.

Assuming it weathers the storm, many of Netflix’s new customers will come from international markets. The company launched service to 43 countries in Latin America and the Caribbean last month. It’s widely expected to expand to parts of Western Europe early next year.

I’m off to make a pie. Might go well with a movie …