Netflix — I told you so / Why Netflix stock is so volatile

Posted at 12:00 PM ET, 10/25/2011 Netflix — I told you so By Alexandra Petri Red envelope, pink slip. (Photo by Justin Sullivan/Getty Images)Netflix, I hate to add insult to the loss of 800,000 customers, but I just wanted to say: "I told you so." It's not just that Qwikster is a stupid name, and that the subdivision of services was a stupider idea. This was never rocket science. If you hike up people's prices without providing any increase in service, hoping they won't notice, they'll notice. "The trouble was that we didn't explain this well enough," Netflix CEO Reed Hastings said. No, Reed. The trouble was that you decided you could provide us less value without our noticing or leaving. Only Facebook can pull a stunt like that, because Facebook has pictures of our college indiscretions, records of our musical tastes and images of our babies. And it's free. Netflix never had quite the captive audience it thought it did. Blockbuster does exist. Sure, most of its stores have been converted into museums and Vacant Lots Where You Are Pretty Sure You Could Obtain Meth If Only You Knew What To Ask For. And what was the idea behind dividing into Netflix ("for people who get the Internet") and Qwikster ("for morons who cling to the old ways")? Don't divide the baby. It indicates to the baby that you do not love it. The DVD rental artist formerly known as Netflix — now Qwikster? Bisquick? Netflix again? — plummeted in our estimation, taking its stock price with it. You were doing so well. You had us. You had us at "Hello, here are infinite videos for a fixed monthly rate, both physical DVDs and streaming." But then you pulled a Mel Gibson. You took all the accumulated goodwill that you had built up slowly over the past decade and squandered it on a meaningless, vague and at least slightly insulting diatribe. And did I mention that Qwikster is a terrible name? If not, it's a terrible name. If you'd watched any of the movies you were so busy shipping to us in brightly colored envelopes and allowing us to stream, this whole crisis might have been averted. Never mind that all the movies you suggested I watch next were vaguely insulting — although I appreciated your suggestion that "if you liked 'The Curious Case of Benjamin Button,' bludgeon yourself with a blunt object and go rethink your life." If "The Talented Mr. Ripley" taught us anything, it is that no one is ever quite irreplaceable. Also, never wear turtlenecks, or your lover will strangle you. By Alexandra Petri  |  12:00 PM ET, 10/25/2011  Why Netflix stock is so volatile OCT 25, 2011 13:15 EDT Daniel Indiviglio looks at the impressive plunge in Netflix's stock price, both today and over the past three months or so, and wonders what on earth could have happened in the real world to justify such a plunge. Even if its stock was overvalued at its July peak, a 74% drop in a little over three months is enormous. Was it really that overvalued? The company may now be undervalued: investors may be overreacting. Indiviglio's main point is well taken. The standard view of stock markets is that they're some kind of objective collective judgment on the fundamental outlook of a company. The company does whatever it does, generating revenues and profits and cashflows and the like, and then the stock market places a present value on those fundamentals. Under that model, the price action in Netflix makes no sense. But that model doesn't reflect the real world. In the real world, many companies — especially ones with high-flying stock prices — become self-fulfilling stock-price-appreciation machines, at least until the party stops. And what's happening to Netflix's stock price has everything to do with Netflix's stock price, and very little to do with Netflix itself. Whitney Tilson, famously, was one of many people who went short Netflix at about $180 per share and busted out when it just kept on rising. Netflix, as the chart above quite clearly indicates, was for a very long time a steamroller which would just flatten anybody who tried to short it. And so the shorts went away, bruised, bloodied, and beaten. Without short interest, there was almost nothing keeping Netflix stock in the realm of sanity. If you wanted to buy it, you needed to find somebody willing to sell it. And with the stock going ever upwards, such people were very hard to find. The stock had its own dynamics, which became increasingly divorced from any corporate fundamentals. Or, more accurately, the stock dynamics became entrenched within Netflix's corporate fundamentals. The deals I wrote about yesterday — like paying $30 million per movie for the right to stream DreamWorks's animated films months after they're available on DVD — were cheap when they were essentially being paid for with bubblicious Netflix equity. Indeed, insfoar as they caused the stock price to rise, they had negative cost to Netflix: the more deals like this that Netflix did, the more valuable Netflix became. But then the stock started falling, and all those dynamics were reversed. In a normal company with some kind of short interest, a falling stock price is met with shorts taking profits and supporting the price. In this case, the shorts were few and far between, and they too were enjoying the momentum trade. They weren't covering. Indeed, short interest started going up, rather than down: all the momentum traders who were happy making money on the way up were equally happy to try to make even more money on the way down. And suddenly investors started looking at corporate fundamentals, and asking questions about whether streaming operations could ever be hugely profitable for Netflix — or even profitable at all. The dynamics of the rising share price were clear: every time that Netflix looked as though it was making lots of money, the price of the next streaming deal would only go up. Netflix has to buy streaming rights from big-media companies, and those companies are going to extract as much money as they can from Netflix, up to and possibly even beyond the point at which it declares bankruptcy. It's the big-media companies which have the pricing power here, and now that Netflix has set eye-watering precedents for things like DreamWorks Animation and House of Cards, it's going to find it difficult to pay more reasonable rates going forwards. So people with equity in Netflix are in a difficult place. Their company is locked into a model where it pays billions of dollars for streaming rights, while keeping the price to subscribers dirt-cheap. That's a model which on its face looks much more attractive to the content creators than it does to Netflix. And it's very hard to place a value on the permanent equity of Netflix in that kind of dynamic. When it was going up, it was going up. But now it's crashed so dramatically, no one has a clue where Netflix stock should be trading, or even whether Netflix — having largely abandoned its DVDs-by-mail business model — even has a viable model at all.