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Netflix co-founder and CEO Reed Hastings. (Hand-out/Netflix Inc.)
Netflix co-founder and CEO Reed Hastings. (Hand-out/Netflix Inc.)

Market Blog

Netflix drops: Been there, done that Add to ...

Even with the share price drop on Tuesday, Netflix Inc. shares still trade at about 65-times trailing earnings - a lofty valuation that gives some skeptics the shivers. But if you think that Tuesday's decline marks the end of Netflix's remarkable bullish run, you won't find history on your side.

The dip comes a day after the video streaming and DVD rental company reported second quarter earnings of $68-million (U.S.) or $1.26 a share, up 55 per cent over last year and ahead of expectations. But investors seemed put off by the company's forecast for the third quarter, which came in below expectations.

Longer-term, of course, there is the question of rising competition. Apple Inc. can stream videos through its iTunes service. Various other companies are also entering the market. On Tuesday, Wal-Mart Stores Inc. said that it would stream 20,000 titles. The share price decline also comes after Netflix this month boosted prices for consumers who want to rent physical DVDs and stream content online, raising concerns about the company's popularity among consumers.

Still, Bespoke Investment Group pointed that there have been plenty of other moments in recent years when Netflix shares have fallen sharply following earnings announcements - only to rebound consistently soon after. When the shares have opened at least 5 per cent lower, they have gone on to rise an average of 6.7 per cent within the next month, with positive returns six out of nine times.

"A lot of traders are saying that the time has finally come for Netflix to begin its descent to zero, but the same was said the last two times that the stock traded down big on earnings last July as well as this April," Bespoke said on its blog. "It could indeed be the end of the run for Netflix, but recent history has shown it's far from a guarantee."


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