Netflix's (NFLX) shares had plummeted around 16% due to cutting down of the challenging domestic subscription target, from 7 million to 5.4 million for the year. The decline has been offset by unconfirmed rumors of Microsoft (MSFT) looking to buy the company. The current price of $69 is above the consensus mean price target of $65. As the volatility in the stock price continues, we reiterate our earlier recommendation of avoiding NFLX.
In the 10% session after the Q3 earnings release, CEO Reed Hastings said that the company is on track to full brand recovery within a three year period, helped by spending on originals. Free cash flow is expected to be negative for several coming quarters due to funding of originals. It is of importance to know that according to the earnings call transcript, the company does not have rights for syndication, DVD and licensing of original content. Moreover, the CFO David Wells said in the earnings call that original content would be less than 10% of the hours viewed, or maybe less than 5% for next year. This gives rise to the debate of how many subscriptions can be gained through offering the expensive original content.
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