About Netflix Inc.
What does the company do? Subscription-based Internet service and DVD rental for TV shows and movies
2010 Financial report:
Net revenues: $2.16 billion
Net income: $161 million
Q. I am worried about Netflix Inc., whose shares I own. What is the outlook?
A. The stock of this leader in online video streaming and DVD rental, previously considered a glamor investment because of robust growth, has been severely punished.
The company's problems started with its announcement of a hefty increase in DVD subscription prices connected to a now-cancelled plan to separate its streaming and DVD rental businesses. A resulting drop in subscribers and the company's forecast of an operating loss for the first two quarters of 2012 made matters worse.
Shareholders must decide whether Netflix missteps are a temporary stumble or a fall off a cliff that draws into question the decision-making of management led by founder and CEO Reed Hastings.
High-visibility deals with Disney-ABC Television, AMC, Dreamworks, The CW and MGM are indicative of its aggressiveness in licensing content here and abroad. It stands to reason that streaming video offers greater potential than DVD rentals tied to postage and packaging, yet this means expensive deals and strong competition.
Shares of Netflix (NFL) are down 50 percent this year following last year's 219 percent gain. Netflix earnings increased 65 percent in its third quarter, but it lost about 800,000 U.S. subscribers.
The financial impact of the price-hike reaction was "relatively minor," the company said in its quarterly letter to shareholders, though "many perceived us as greedy." It expressed concern about long-term subscribers who were shocked by the pricing changes. Many more canceled their subscriptions than expected.
Consensus analyst rating of Netflix shares is a strong "hold," according to Thomson Reuters.
Hastings founded Netflix in 1998 after a video store socked him with a big late fee for a DVD rental of "Apollo 13." The company benefits from a sophisticated software system, their library of DVDs and a subscriber base of 21.4 million streaming subscriptions and 13.9 million DVD subscriptions at the end of the third quarter.
International expansion is bringing in new subscribers and is key to growth. Netflix has already entered Canada and Latin America, with the U.K. and Ireland to be added in early 2012. Nonetheless, this expansion is costly and unpredictable in the short run.
The Netflix earnings growth rate next year is expected to be 38 percent versus 52 percent forecast for the specialty retail industry, according to Thomson Reuters. The five-year annualized return is projected to be 29 percent as compared to 17 percent expected industry-wide.
Q. I'd like to know whether I should keep my shares in Vanguard Capital Opportunity Fund (VHCOX), which I have had for quite a while but which haven't been doing so well.