By Louis Bedigian for Benzinga
Netflix, Inc. (NASDAQ: NFLX) fell more than 25 percent in after-hours trading Wednesday after the company revealed its Q3 results and Q4 guidance.
The decline initially reduced Netflix's price to roughly $350 per share. The stock recovered slightly on Thursday, but was still down 20 percent at time of publication.
"[It's possible] that in Europe the population of subscribers to Netflix is not as large as people thought because Europeans are [Virtual Private Networking] the U.S. Netflix," Tullo told Benzinga. "They're using VPN technology to get into U.S. Netflix."
If that's the case, it could explain why Netflix gained three million subscribers last quarter (versus the 3.5 million that some analysts expected).
"Therefore, you're trading high-margin U.S. customers with low-margin European customers as they stop VPNing, and that would explain the guidance," Tullo added. "To me, that's the story that kind of ties it all together."
First HBO Go announced that it would be available without cable in 2015. Now CBS Corporation is doing the same with its mainstream network. And Showtime isn't far behind.
"The CBS news today is not good for Netflix because they will start pulling their stuff off [Netflix] and start putting it on their own over-the-top channel," Needham analyst Laura Martin told Benzinga.
Like everyone else, Martin is also concerned about the firm's earnings results.
"I think the two things that are really frustrating Netflix is the guidance for 4Q, [which] is horrible," she added. "Their cost of content is massive. In 90 days it went up $1.2 billion. The shift toward film programming is riskier than television because you pay a lot more for a lot less hours of programming. You know Netflix isn't going to only have hits on its hands. It adds risk to the investment case."
Tullo said that HBO's announcement validates what Netflix has been saying all along.
"They've been saying they're in a race to beat HBO before HBO beats them," said Tullo. "I'm glad HBO did it. I think HBO is gonna do great. But the idea that people won't subscribe to Netflix because they got HBO, I agree with [Netflix] management -- I don't think that's an issue."
Many consumers are likely to get both services, but there is one area where HBO has a distinct advantage.
"HBO Go can provide you with more current movies," Tigress Financial Partners analyst Ivan Feinseth told Benzinga. "Netflix is not targeting current movies."
On Wednesday Netflix announced that it had acquired the streaming video rights to every episode of "Friends."
They will all be there for you, Jan.1, 2015 https://t.co/EdGNWtFsZl
— Netflix US (@netflix) October 15, 2014
"It's expensive," Martin said of the deal. "The number that they disclosed is that they have $8.9 billion in content obligations now, up from $7.7 billion 90 days ago. Part of that is 'Friends,' part of that is the Adam Sandler movies, part of that is the 'Crouching Tiger' sequel. But I would say films [comprises] of most of it. 'Friends' is expensive, but not compared to the risk when you start doing movies."
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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