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Netflix Fails to Satisfy Customers - Analyst Blog

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The fortunes of beleaguered Netflix Inc. (NFLX) continued to deteriorate after the DVD rental and online streaming company emerged as one of the worst performers with respect to customer satisfaction among the largest online retailers this holiday season.

According to the latest holiday e-retail satisfaction index published by research firm ForeSee, Netflix lost seven points this year to post a score of 79, which is at par with the index average. The drop is significant considering the fact that Netflix was the joint leader in the 2010 and has been one of the top-performers historically.

Customer satisfaction index is particularly important for retailers as it leads to higher sales, more loyalty and increased word-of-mouth recommendations. ForeSee, which tracks the top 40 online retailers by sales volume, publishes the list on a half-yearly basis.

Netflix's decline in the customer satisfaction index has been primarily attributed to the company's decision of raising the prices (by 60%) and splitting its DVD and video-streaming services. Although Netflix backtracked following an 800K subscriber loss in the third quarter of 2011, the turn of the events was reason enough to confuse both analysts and investors.

By the time management scrapped the idea of splitting the company into two, the damage had already been done in terms of investor sentiment and stock prices. Netflix's market value had dropped from $16.00 billion to $3.77 billion in the space of just 5 months.

To make matters worse, Netflix provided dismal outlook for the current quarter and fiscal 2012. Though the company expects to maintain profitability on a global basis, it acknowledged that the exodus of subscribers in the domestic market would persist in the current quarter, albeit at a slower rate.

As per theForeSee survey, Amazon Inc. (AMZN) topped the list with a score of 88; the highest by a company in the index's seven-year history. ForeSee analysts believe that the gap between Amazon and Netflix (which used to hover around 1-2 points over the last couple of years) has widened considerably (9 points) this year, owing to Netflix's debacles and Amazon's increasing penetration into the streaming video and rental business. Based on these facts, the analysts believe that Netflix will find it increasingly difficult to reduce this gap going forward.

However, Netflix is leaving no stones unturned to woo back its domestic customers. Netflix continues to sign a number of licensing deals with big Hollywood production houses to provide varied content. Recently, Netflix raised $400 million in cash through stock offerings at $70 per share and convertible bonds. We believe that the proceeds from the transaction would also help Netflix to develop its streaming library, particularly in its domestic market, to attract new subscribers going forward.

Recommendation

We maintain our Neutral recommendation over the long term (6-12 months). We expect Netflix to drive subscriber growth on the back of more appealing services to its customers and expect to contribute to the top line of the company over the long term.

However, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to the international expansions can hurt growth in the near term.

We currently have a Zacks #3 Rank for Netflix, which translates into a Hold rating in the short term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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