Netflix’s stock has taken a walloping this week, but you shouldn’t feel too bad for the company’s investors.
In intraday trading on Friday, shares of the streaming media giant were down as much as 7.5 percent. That marked the fourth straight day that the Los Gatos company’s stock price has fallen. It’s shed 16 percent of its value — worth about $8.3 billion in market capitalization — over that time.
Since reaching its all-time high of $129.29 a share in intraday trading on Aug. 5, Netflix stock has lost 18 percent of its value, or more than $10 billion in market capitalization.
It’s not clear exactly what’s causing the sell-off, although it’s likely that some of it has to do with investors taking some profits off the table. Netflix’s stock has more than doubled in the year to date.
As professional stock trader Phil Davis noted in a recent interview, the run-up in Netflix’s stock had left the company’s shares with a price-to-earnings ratio of around 300, a huge premium that can be hard to justify even with fast-growing start-up companies.
With that kind of heady valuation, it doesn’t take much to spook investors into worrying that a company won’t meet the growth targets needed to justify it. One story that might have weighed on investors minds was published by Forbes earlier in the week. The article suggested that Netflix, which is planning a huge expansion of its service globally by the end of next year, may face a big challenge in Africa from South African firm Naspers, which offers satellite TV service in the continent and has already launched a rival streaming service.
But even seemingly good news could be seen differently by nervous investors. A report earlier this week from Extreamist, a blog news site that covers the streaming media market, indicated that Netflix, which shows its programs ad-free, is saving its subscribers from watching 130 hours of commercials each year. Sound great, right? But to investors, that may sound like a big missed opportunity, given that CEO Reed Hastings declared in June that, “no advertising (is) coming onto Netflix. Period.”
Meanwhile, the company has been contending with some bad press that could also potentially have implications for its bottom line. Netflix had a PR coup recently when it announced earlier this month that it would give employees who are new parents up to a year of paid leave.
But the good feelings quickly dissipated when it came out that Netflix wasn’t offering the same benefit to the hourly employees that work for its DVD business’ distribution centers. The omission of those approximately 450 employees from the new policy has led to an outcry and pressure on the company to include them in it. That would be good for them, but not necessarily for the bottom line of the DVD business, which, while shrinking, is still a big profit center for the company.
Still, it’s hard to feel too bad for Netflix investors. In the year to date, the company’s stock is up more than 117 percent. And since bottoming out less than three years ago amid a disastrous price hike and aborted attempt to spin-off the DVD business, Netflix’s stock has appreciated by more than 1,275 percent.
Photo courtesy of Netflix.
