The Netflix Horror Show Continues

by Tom Taulli | December 1, 2011 8:48 am

Netflix NFLXIn Wednesday’s huge rally that saw the Dow Jones Industrial Average climb almost 500 points, just about every stock in the world increased in value. But there was one that couldn’t find any interest from investors — Netflix (NASDAQ:NFLX[1]), which closed off 4.5% to $64.53. And this came off a 3.4% drop Tuesday, when the markets still were in bull mode.

The seemingly inexplicable fall has occurred despite recent optimism from analysts. For example, Susquehanna Financial Group’s Vasily Karasyov improved his rating for NFLX shares from “negative” to “neutral.” And hedge fund manager Whitney Tilson told Barron’s that he believes Netflix’s stock will double over the next few months!

But with the recent losses against the broader markets — not to mention the almost 80% haircut to NFLX shares since mid-July — it’s going to take much more than upbeat analysts to make investors confident in Netflix. Consider that the company, in a desperate grab for cash to go toward providing better content, recently raised $400 million[2] by selling stock and convertible notes, illustrating NFLX’s serious cash flow issues. And that move was made to stave off increasingly serious competition from operators including Hulu and Amazon (NASDAQ:AMZN[3]).

Not to mention, Netflix also has to get a sense of the cash-flow impact for next year. If its content continues to lag and its membership base continues to shrink, the consequences for NFLX could be severe.

Still, the most damning sign of Netflix’s problems remains the stock’s recent trading activity. Whenever the markets experience a huge rally and a particular stock sits the bench, it often is evidence of tremendous weakness. The situation looks more dire when that stock’s value already has taken a huge dip. So despite being at lows not seen since early 2010, NFLX still could be a toxic holding for investors.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook[4],” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling”[5] and “All About Commodities.”[6] Follow him on Twitter at @ttaulli[7]. As of this writing, he did not own a position in any of the aforementioned stocks.

  1. NFLX:
  2. raised $400 million:
  3. AMZN:
  4. IPOPlaybook:
  5. “All About Short Selling”:
  6. “All About Commodities.”:
  7. @ttaulli:

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