Netflix, Inc. Stock Is Out of Its Funk (NFLX)

Shareholders of Netflix, Inc. (ticker: NFLX) had to be thrilled with the company's third-quarter earnings report -- but while the company delivered stronger-than-expected earnings and subscriber growth, that hardly means an end to the suspense. In fact, it's more like the latest streamed episode of your favorite Wall Street drama, with the plot just beginning to thicken.

Granted, the third-quarter results showed earnings of 12 cents a share, double what analysts predicted. But this is just one quarter, folks. The results play out in a much larger context that speaks to the future of streamed video itself and whether that feeds into what investors like to call the revenue stream.

If you haven't caught the entire backstory, here's a quick catch-me-up: Back in 2015, Netflix was a market darling that had everything going for it. Consumers flocked there after cutting the cord with their cable companies. Market mavens celebrated the leadership of CEO and co-founder Reed Hastings.

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It all made for a charmed year, as Netflix ruled through the summer as the undisputed top performer in the Standard & Poor's 500 index. From December 2014 to July 2015, it more than doubled its share price. It finished the year up 130 percent.

But up until now, 2016 had been a far different story as subscriber gains thinned. And almost from the day Baby New Year crawled out of his diaper, Hastings came to resemble something of an emperor without clothes -- or at least one who'd shed a few luxurious layers.

From its Dec. 4, 2015 peak -- just pennies shy of $131 a share -- NFLX slid by more than a third just two months later. Just before the third-quarter report it traded at $100, off close to 9 percent for the year. And while it's up 22 percent from the Oct. 17 report, it's still below that apex, trading at about $127 per share.

Meanwhile, questions that no single report can answer hang in the balance. Like: Will Netflix's share of the streaming service pie shrink thanks to its rivals? Or will it grow fast and fat enough to feed all marketplace leaders at the table?

"NFLX's best days are likely still well into the future," says Michael Kramer, a portfolio manager on Covestor and founder of Mott Capital Management in Garden City, New York. "The company is at the heart of significant demographic shift in the way people get content. Anyone who has children around the age of 5 knows this. I call these kids, and my kids, the On Demand Generation."

And it's the young denizens of On Demand Land that Hastings has at his command. "Nearly 100 percent of their viewing experience is on Netflix or YouTube," Kramer says. "They hardly if ever watch anything on a set-top box."

The company also holds a hallowed spot in the quartet of bellwether high-tech stocks known as FANG. In this foursome, either Amazon.com ( AMZN) or Apple ( AAPL), depending on whom you ask, joins Facebook ( FB) Netflix and Alphabet/Google ( GOOG, GOOGL).

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Yet nagging issues remain as to how Netflix will continue to build its subscriber base, especially if it loses ground in the crowded field. Nor did it help when rumors of an investment by Alibaba Group Holding ( BABA) were quashed in August.

Some connect Netflix's long-term subscription challenges to customer loyalty, which was damaged when the company raised its monthly prices from $7.99 to $9.99 in May. To be fair, that total yearly jump of $24 is just a fraction of what cable customers pay for just one month of basic service.

Yet what Netflix gained in revenue it lost in terms of a tarnished image -- with one customer taking Netflix to court in June in a class action lawsuit over the hikes. Some experts say it's just another instance of a problem that dates to 2011, when Hastings announced plans to split his company into separate branches for DVDs and streaming.

"This is a case study of a deep, self-inflicted wound that many organizations never completely heal from," says Cecilia Lynch, founder, CEO and chief strategist at Focused Momentum in San Francisco. "It immediately created a negative brand association effectively flushing away significant equity. They have never recovered from this arrogant misstep."

Or have they? "Ultimately for Netflix, any loss of customers will be temporary," says P.K. Kannan, a marketing professor at the University of Maryland's Robert H. Smith School of Business. "They could soon return, paying the increased prices, which would be similar to what happened when Netflix decoupled its streaming and DVD services a few years ago."

"For subscribers, Netflix needs to quickly transition from 'trial' to 'share' marketing," says Greg Portell, partner at A.T. Kearney and based in the St. Louis area. "Rather than just getting consumers to spend $10 for monthly movies, Netflix now has to convince consumers their product is better than the other services competing for the same $10. Fragmentation of the content market creates more options for consumers."

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Still, it's yet to be seen which way the tides of consumer preference and Wall Street confidence will shift. At least for the time being, Netflix can stick to its business strategy -- or, if you will, has no reason to change course midstream.

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A former longtime staff writer, editor and columnist at the Chicago Tribune, Lou Carlozo writes about investment for U.S. News & World Report, and personal finance for Money Under 30 and GOBankingRates. He is based in Chicago. Connect with him at linkedin.com/in/loucarlozo.