There has been a lot of buzz about the recent pounding that Netflix has taken not only from the market, but also from analysts. After a day of listening about Enterprise Risk Management, I figured it would be good to comb through the posts and sift out the insightful from the ignorant. AVC and Dan Frommer are both experts at evaluating high tech businesses. Their analysis is distinct from others in that it focuses more on their opinion of the Netflix team and financial projections and less on the effects of the decision on there customers.

A couple things are going on here.

First, while my first reaction was to hand down some epic finger wagging from my tower of managerial judgment , the reality is that Netflix knew what they were in store for. I’m not being a Netflix fanboy, but it is inconceivable that a management team could expect not to get pushback from a change like this. They no doubt listen to A. Dubs for advice, so that they need only “follow the money” to identify their primary stakeholder. The most reasonable explanation that I have heard is that Netflix was forced into the decision following negotiations with those controlling their access to content and had to act accordingly. This doesn’t excuse the communication debacle. Any ambulance chaser worth their salt knows that the malpractice suit doesn’t come from the leg that got sewn on backwards, it came from the subsequent failure in communication between the parties.

Second (and more importantly), the question really comes down to how much weight should we put into Netflix’s track record and how much should we put into the market’s reaction? Lots of behavior going on here with looking into trends, the market possibly overreacting, and very little mention of financial analysis. The 15% hit in the stock has probably less to do with their downward adjusted subscriber numbers which were released on Thursday and more to do with a drop in investor confidence following the announcement of Qwickster today. Has the management team lost the magic that made their stock climb p 600% between 02/10 and 06/11? My argument is no, given that their DVD subscribers will only be off by 5% and it is important from a strategic standpoint for Netflix to position themselves in the streaming business. Some more good numbers to consider via AVC are that the stock is trading at essentially half the EBITA it was two months ago.

Can Netflix replicate the success that they have seen in the past 14 years? It is clearly a hard mark to hit again, but it doesn’t appear that the drop in the stock price is well substantiated at this point.

Update: 9/20/11 12:44PM – Alas the NFLX is down today again. They are now at 12 mo. low. I could go on about the Greece’s default, but I still think NFLX is undervalued.

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