Netflix Punished After Missing Internal Growth Estimates

Netflix, which has been one of the darlings of the stock market over the past 2-3 years, is currently undergoing a major haircut in afterhours trading.

Shares of the streaming video company closed the regular session at $448.59 but are currently trading at $330.00 in afterhours trading. This 120 point decline represents a loss of nearly $7 billion in market capitalization for Netflix.

Investors voted with their feet in afterhours trading by dumping their shares en masse. The major reason? The company posted growth numbers that underperformed their previous projections. The company was originally expecting to add 3.7 million worldwide subscribers in the third quarter and ended up adding 3 million.

Netflix implemented a small price increase for some of their subscribers earlier in the year and this is seen as the major reason behind the company's lower-than-expected growth numbers. In his letter to shareholders, Netflix CEO Reed Hastings said that "slightly higher prices result in slightly less growth."

Another reason for concern for shareholders of Netflix? The impending introduction of HBO GO, a new stand-alone online service from HBO that is expected to launch in 2015. Netflix claims that HBO GO will not steal any of their subscribers but many investors and market observers seem to be thinking differently.

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Netflix is still doing many things right though it is their future growth projections that remain a concern for investors.

That is the problem with growth companies that have very high P/E ratios - when the growth finally starts to stall, the shares of the company usually get destroyed.

Filed under: General Knowledge