Netflix stock tanks, market cap drops to $4B

Netflix's stock drops more than 36%, loses more than $2B in market cap

Netflix stock tanked Tuesday morning upon opening, dropping a precipitous 37.55% to $74.24 from $118.84, and the company's market cap has dropped by $2.3 billion to roughly $4 billion. The steep drop in stock follows Netflix’s third quarter earnings report yesterday, in which the company revealed it has lost more customers than it previously anticipated.

Last month, the company announced that it expected to lose as many as one million subscribers in Q3—which included cancellations and reduced growth.  In other words, some 500,000 customers would actually cancel and the company would fail to draw another 500,000 potential customers.

The actual numbers were more dismal than that.  Some 800,000 customers cancelled their accounts in Q3, which means Netflix lost out on a total of 1.3 million customers last quarter.

All told, Netflix’s total number of subscribers dropped to 23.8 million from 24.6 million.  Consequently, Netflix is lowering its Q4 expectations.  The company projects that profit will be in the $19-$30 million range, or 36-70 cents a share on revenue of $875 million.  Analysts, however, had projected a profit of $1.09 a share on revenue of $920 million.

The loss in subscribers is a huge change from CEO Reed Hastings’s assurances during the second quarter earnings call that subscriber cancellations were milder than expected.  Shortly thereafter, Netflix announced its projected loss of one million subscribers in the third quarter. 

Hastings again took the opportunity this time around to reassure investors that cancellations were leveling out. 

“What we've seen is a second wave of cancellations from the price increase,” Hastings explained.  “The first wave was in July upon announcement, and the second wave has been in September and October, as people become more aware of the price increase, and many have changed the plan or canceled. And that wave has been declining very steadily over the past couple of weeks. And so we have substantially less weekly cancels now than we did just 3 to 4 weeks ago.”

Netflix also projected big losses in its DVD business in the fourth quarter, with subscribers dropping to 10.3-11.3 million from Q3’s 13.9 million.  Meanwhile, despite Netflix’s emphasis on its streaming business, streaming subscribers will flatline at 20-21.5 million in Q4, compared to 21.4 million in Q3.

Additionally, the company is expecting some losses from its latest foray into the UK and Ireland as part of its international expansion.  Following the UK/Ireland launch, Netflix says it will halt further international expansion until it can become profitable again.

Despite all the bad news, Netflix’s third quarter revenue actually beat expectations as profit rose 65% to $62.5 million, or $1.16 a share.  And revenue rose 49% to $821.8 million, while analysts had projected a profit of 95 cents a share on revenue of $812.8 million.  

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