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Shares of Netflix took another drubbing Tuesday as one influential analyst slashed his “fair value” estimate of the stock by 40 percent and Blockbuster and parent Dish Network told reporters it would unveil on Friday “the most comprehensive home entertainment package ever.”
Netflix shares sunk 10 percent Tuesday to $130.03 and have now lost 57 percent of their value in two months, providing a stark reminder to investors that momentum on Wall Street – the kind that took Netflix stock from $40 to $300 in two years — can turn on a dime.
The stock first started sinking after Netflix announced in July a dramatic price increase to help defray the rising cost of licensing movies and TV shows for streaming. The stock took another hit when it was revealed that the price hike will cost the company 1 million subscribers, and then the stock was dinged again this week when CEO Reed Hastings said Netflix will split the streaming business from the DVD business and call the latter Qwikster.
Indications that Dish and its Blockbuster acquisition are radically ramping up their assault on Netflix certainly didn’t help matters on Tuesday.
Janney Capital Markets analyst Tony Wible, who was bearish on Netflix even when most analysts were bullish and the stock was surging higher, on Tuesday said fair value for Netflix was now just $102, which is $68 less than he figured it was worth on Monday.
His thesis is that in splitting the company into two services, investors and analysts will see more clearly the declining value of DVD and soaring costs of streaming.
“Netflix’s irrational ‘digital’ multiple has been applied to a dying DVD business over the past two years, which will now be clearly broken out and valued as a mature business,” Wible wrote.
He said the digital side of Netflix is worth $86 a share but the DVD side is worth just $16 a share, the price at which Netflix debuted in 2002 when it was strictly a DVD business.
As for the rising cost of streaming rights, Wible wrote in his Tuesday report that the company is moving toward a tipping point, “whereby it cannot afford its current content obligations.”
“Investors need to be acutely aware of the risk as this point may be irreversible and could eliminate equity value in the streaming business” Wible wrote. “Competitors could act to exploit this weakness.”
As for Blockbuster, a spokesman wouldn’t give details about the new product that will be announced, though analysts suspect it involves a Netflix-like subscription streaming service. Dish CEO Joe Clayton and Blockbuster president Michael Kelly are revealing the strategy at a press conference Friday in San Francisco.
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