A guy like Warren Buffett could have seen this one coming from a mile away.
After losing more than 800,000 subscribers in the third-quarter shares of Netflix (Nasdaq: NFLX) are dropping like a stone tossed into the deep end.
Today’s price action has only continued the trend that began in mid-July when this heavily traded momentum plaything first began to run out of new buyers.
Since then, Netflix “investors” that bought this wreck at the top are down by 75% in just three months.
It’s a perfect example of what you get when buy a company whose only reason for being is completely vulnerable to commodity pricing.
You don’t—as Buffett would say—have a moat.
As new competitors inevitably enter the market at lower prices, your business model blows up in your face.
That’s especially true if you are not much more than the middle man between content producers and content consumers. Eventually, you get end up getting squeezed on both ends.
In a letter to investors, Netflix CEO, Reed Hastings, said that many of the company’s “long-term members felt shocked” after the company increased prices by about 60 per cent, adding “more of them have expressed that by canceling Netflix than we expected.”
As a result, Susquehanna Financial analyst Vasily Karasyov downgraded the stock from “neutral” to “negative” and slashed his 12-month price target from $124 to $60 in a note entitled “The End of the Road.”
“Looks like the nuclear winter scenario is playing out for Netflix,” he wrote. “Subscriber base expansion in the U.S. appears to be minimal and losses from international launches are weighing on profitability. We think third-quarter results combined with fourth-quarter guidance and comments on 2012 put to rest the bull case on Netflix as we know it.”
He added: “Netflix stock may be transitioning from the momentum stock category into the broken story basket.”
That about sums one this up… Take it as a lesson in the kinds of investments to avoid.
Somewhere along the road to financial freedom…
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