Netflix plunged 37% at the opening bell on Wall Street Tuesday, after reporting Q3 earnings Monday evening. Earnings were actually up, but investors were shocked that Q4 subscriber projections were even worse than feared in the wake of the company’s controversial pricing moves and an abandoned plan to split in two.
“NFLX shares are under pressure following 3Q results for two reasons. First, 4Q subscriber guidance for both the streaming and DVD businesses came in below estimates given a wave of cancellations in response to the pricing change. Secondly, Netflix guided towards operating losses starting in the 1Q of 2012 for a few quarters owing to international business,” said Barclays Capital analyst Anthony DiClemente in a note to clients.
He dropped his price target for the stock from $260 to $125 – but that’s still far above where the stock headed on Tuesday. It fell over 37% at the opening bell to around $75 – down from a close of $118.84 on Monday. The stock closed Tuesday at $77.37, down 35% for the day.
“We believe the capitulation in shares is overdone and would point to two encouraging data points: 1) gross subscriber additions were up 20% Y/Y in the 3Q despite the subscriber reset, and 2) unique Netflix subscribers are expected to be slightly up in Q4. These two points may not have been readily apparent upon a cursory read of the shareholder letter. Our price target of $125 per share is derived using a sum-of-the-parts (SOTP) analysis which essentially values the domestic streaming business at $3.8B based on 14x our 2012E EBITDA of $270M, the DVD business at $1.6B based on 3.5x our 2012E EBITDA of $456M, and International at $775M based on 3x our 2012E revenue of $258M. Given more granular reporting for the domestic streaming and DVD businesses, our price target of $125 is now derived using SOTP instead of PE,” DiClemente concluded.
