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Why Netflix Will Bounce Back From Its Latest Disappointment

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Down but not outPhotograph by Bloomberg via Getty Images

Netflix Inc’s shares fell as much as 14 percent on Tuesday after the video streaming company signed up far fewer subscribers than expected in the latest quarter and offered up little hope that things would improve soon.

However, analysts said the maker of “House of Cards” and “Orange is the New Black” is likely to start growing strongly again next year as potential subscribers become more comfortable with its plans to raise prices.

Netflix (NFLX) has been phasing in price rises for existing customers by $1.00 or $2.00 per month for the past few months, a process it calls “un-grandfathering.”

“Management highlighted that the ‘un-grandfathering’ process is roughly halfway done and should extend into November, although we believe the largest impact will be felt in (the current quarter),” Jefferies analysts wrote in a client note.

 

Netflix, which has 78 million subscribers in more than 190 countries, said it expected to add 300,000 subscribers in the United States in the current quarter.

That’s less than half the 774,000 additions expected, on average, by analysts surveyed by FactSet StreetAccount.

The company’s estimate that it would sign up 2 million new subscribers in markets outside the United States in the quarter was also well below the average forecast of 2.85 million.

Netflix signed up 1.7 million new customers in the three months ended in June 30, far fewer than the 2.5 million it had forecast.

The company said media publicity about proposed price increases had hurt its business.

Analysts agreed with the company that the Rio Olympics in August could also contribute to a slowdown in sign-ups.

J.P. Morgan analysts said they expected Netflix to work through its pricing changes in the second half of the year and emerge as bigger and more profitable company into 2017, helped by the price increases.

At least 20 brokerages cut their price targets on the company’s stock, by as much as $30. BMO Capital Markets cut the most, lowering its target to $85 from $115.

Netflix’s shares trade at about 143 times forward earnings, compared with Facebook Inc’s 28 times and Google-parent Alphabet Inc’s 20 times, according to Thomson Reuters StarMine.

Only one brokerage, UBS, lowered its recommendation on Netflix’s shares, to “neutral” from “buy.”

Of 43 analysts covering the company, 24 have a “buy” or higher rating, 14 have a “hold” and five have “sell” or “strong sell.”

“Weakness in the stock represents a good long-term buying opportunity given that the full benefits from Netflix’s international launch and content investments have yet to be realized,” Canaccord Genuity analysts wrote in a client note.

Cannacord trimmed its price target to $115 from $120, but maintained a “buy” rating.

Netflix shares were down 13.6 percent at $85.25 in late morning trading on Tuesday. Up to Monday’s close $98.81, Netflix’s shares had fallen 26 percent since touching a record high of $133.27 in December.