A key to Netflix’s (Nasdaq:NFLX) great success has been its focus on the long term. To this end, the company recently boosted its pricing as much as 60% to move customers from DVD delivery to web-based streaming video. It was a gutsy move, but not out of character for Netflix.
The strategy makes a lot of sense, but it has caused some short-term concerns for investors. Shares of Netflix tumbled 10% on Tuesday as traders got the jitters after the company’s second-quarter earnings report late Monday.
Netflix saw a 52% spike in sales to $789 million, with profit up 55% to $68 million. In addition, the subscriber base increased by 1.96 million for a total count of 25.6 million. But those figures were a bit below expectations.
The company’s third-quarter forecast was also disappointing. The expectation is for a meager 401,000 in new domestic sign-ups and for sales to range from $799.5 million to $828.5 million, as the recent price hike will result in lots of churn.
In the meantime, Netflix will need to deal with intense competition. Rivals include tough operators like Hulu, Apple (Nasdaq:AAPL), Amazon.com (Nasdaq:AMZN) and Coinstar
(Nasdaq:CSTR).
In fact, Wal-Mart (NYSE:WMT) also announced on Tuesday that it will start streaming movies.
But the long term looks strong for Netflix. The company has lots of potential in foreign markets and is working hard to get premium content. And it has the cash flows to execute.
It looks like the price hike will be a temporary hiccup. Netflix bulls will likely come back into the stock, especially as the valuation gets a bit cheaper.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
