How to play it: Did Netflix's very bad day create value?

THE ISSUE: Netflix Inc, one of the most closely-watched "momentum" stocks", dropped nearly 20 percent on Thursday. Is it time to buy 'bargain' shares in the fast-expanding web video service?

By Sam Forgione

NEW YORK (Reuters) - High-flying Netflix's lowered estimate for subscriber growth Thursday sent its shares sharply lower as investors got a disappointing first look at how customers were handling a price increases launched this month.

When the new pricing structure was disclosed some worried it might threaten the fast-growth of the company that has become synonymous with the DVD and online movies. Its shares have been pressured since the new fees were made public.

The stock has been long wired for growth and any disappointment hits hard. Netflix was the top percentage gainer among S&P 500 components in 2010, surging 226.4 percent.

Here are two views on how to play the stock from here:


Beyond mere pricing, subscriptions could be threatened by a content battle, says Tony Wible, media and entertainment analyst at Janney Montgomery Scott. For him, Netflix's lack of access to exclusive content and inability to negotiate a deal with Liberty Media's Starz will hurt profits.

The fear surrounding cable channel operator Starz shutting out Netflix is that the dvd rental company will no longer have exclusive content when its Viacom deal expires in February.

It faces growing competition from well-healed players that have both content and access into customers' homes. "Netflix is sandwiched between cable operators with content and pipes, like Comcast, and companies like Google, Apple, and Amazon, which have bigger balance sheets," Wible said.

Google's purchase of Motorola Mobility and Apple TV can bring big advantages to the table. Netflix, meanwhile, could be burdened in $3 billion of contract obligations.

"If you own shares, sell them. Stay away and don't fall into the momentum trap and catch a falling knife" Wible said.


The other view is that Netflix may now be a bargain, since much of what is happening has already been anticipated by the company, says Michael Olson and Andrew Murphy of Piper Jaffray, who have an "overweight" rating with a price target of $305 per share on Netflix,

"The silver lining is that the primary miss is in DVD subs, while streaming and DVD+streaming subs are essentially in line," the analysts said in a research note.

The analysts say the lower growth is to be expected, and that the declines reflect changes now that will result in higher growth going forward.

"We continue to believe Netflix raised prices on its DVD plans in order to push the sub(scriber) base further toward streaming (instant online video.)"

The streaming business has more potential for profit growth than legacy DVD, which Netflix has been trying to de-emphasize. And it was relatively unscathed.

"In other words, the company missed its Q3 sub target primarily on DVD subscribers (by 800k) and missed only slightly in the streaming category (by 200k)."