Netflix Shareholders Burned by Angry Clients

Perhaps Netflix (NASDAQ:NFLX) should have paid more mind to the thousands of customers that clamored angrily on the web after the company decided to change its pricing plan. Many promised to outright cancel subscriptions to the mail and streaming film and television delivery service two weeks ago after the company announced it would be raising prices by splitting its current $10 a month plan into two separate, individually billable plans at an average of 60% higher cost to customers.

Full Details of Netflix Earnings: Netflix, Inc. Earnings Cheat Sheet: Profits Climb By Double Figures Again.

As thousands expressed their dissent via Facebook, Twitter, and even Netflix’ official blog, the company arrogantly stood its ground, issuing only one official statement on what had quickly morphed into a PR disaster, “Everything Netflix (NASDAQ:NFLX) does is with extensive research and testing and analysis, so we expected some people to be disappointed.” Web-based polls indicated that 30-40% of current customers said they intended to cancel their subscriptions before Sept 1, the date the new pricing plan took effect, though it was unclear whether that threat would be followed through upon. Companies such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) cheered on defecting customers and welcomed them with open arms.

Yesterday the company learned that its angry customers were more than just disappointed, and it was forced to slash its Q3 earnings guidance well below analyst targets (due to no net gain in subscribers for FQ3) and the stock got hammered lower, dropping 9.26% after reporting its second quarter earnings. Once enamored of Netflix (NASDAQ:NFLX) impregnable hold on its subscriber base, the company is quickly losing its favor among analysts. Lazard’s Barton Crockett comments, “[They] came into the quarter as Superman and it looks like they ran into a little bit of kryptonite and lost some of their super power,” with Gabelli & Co.’s Brett Harriss adding, “It’s too early to call on Netflix’s future at this point. I have a ‘sell’ rating on the company based on its high valuation, but I’m not shorting it because it’s still a great company.”

Trading at a current P/E of 72.78, Netflix, widely viewed as a high potential growth stock, has little margin for error in terms of missed earnings estimates and down-revised future guidance. Results must be “flawless to support a stock” trading at such a high earnings multiple, said another analyst. Even more trouble looms for company in the second half of 2011, as wholesaler Wal-Mart (NYSE:WMT) recently announced that it plans to move its movie rental and streaming service “Vudu” to the web, making it a direct competitor with Netflix.