PALO ALTO, Calif. (CNN/Money) -
Webster's Ninth New Collegiate Dictionary lists two definitions of "critic." One is someone who "expresses a reasoned opinion." The other is "one given to harsh or captious judgment."
I'm often accused of being the latter, but believe me, I try to be the former. It's just that every darn time I try to be positive in my criticism, it seems to end up badly.
Take my preview, in March, of the coming IPO of Netflix (NFLX: up $1.87 to $7.09, Research, Estimates), the Silicon Valley company that allows subscribers to rent DVD movies by ordering over the Web.
In my column, I duly pointed out the expected risks about Netflix: that most IPOs of money-losing companies don't typically do well over time, competitors would move in on Netflix's turf, and that its service smelled more than a little faddish. In other words, the thrill of ordering online tends to wear off after a while -- as does the excitement of owning a hot stock.
So much for optimism
Nevertheless, I felt like I'd helped spot a goodie when Netflix sold $83 million worth of stock at $15 in late May. Not bad given where the markets were back then. The shares even rose above $18 briefly in July.
But then it's almost as if the tiny company followed the script of a bad IPO movie we've all seen too many times. It turns out that subscriber churn -- paying customers who don't renew -- is greater than analysts expected. Consumer spending might just hurt DVD rentals as well as the purchase of DVD machines. And, waddya know, Blockbuster and Wal-Mart aren't willing to give the entire DVD rental market to Netflix.
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As a result the shares have tanked and once bullish analysts have turned tail. The bouncy stock price fell below $5 Wednesday before rebounding sharply Thursday, ending the day up 35.8 percent at $7.09.
Justin Baldauf, an analyst for Netflix investment banker Merrill Lynch, reasoned with clients that at $5.77 Netflix had a market value of only $150 million. Considering it has almost $90 million in cash, the true value was just about $60 million, or 0.3 times Merrill's estimate for 2003 revenues.
But who cares what valuation Netflix carries to its 2003 revenues. Baldauf's 10-year (ten years?) discounted cash flow analysis doesn't call for Netflix to start making money until 2004.
Is there a lesson here? Yes. It's that everyone, even critics, sometimes wants to believe. Witness the exuberance over Yahoo! because it succeeded in boosting revenues slightly even as advertising revenue remains stuck. But believing can be an expensive proposition.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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