Netflix Shares Tumble Following New Price Increase

For the past year-and-a-half, Netflix has taken its investors on a joyous ride as they watched the company's stock go from the mid $40s to nearly reaching $300 a share.

During this time, Netflix went on to surpass rival Blockbuster in the category. Netflix successfully debuted in new markets and introduced new products. Each quarter brought more consumers. The company, seemingly, could do no wrong.

That is, until lately.

The first major upset started when the Los Gatos, Calif., company announced a pricing change which infuriated customers. Instead of the usual $9.99 for both streaming and DVD by mail services, Netflix split the two up and offered them at $7.99 each. If users want to do both, they will have to pay $15.98 under the new plan.

In its first earnings call since announcing these changes, Netflix had some good news and more bad news. For the good, the company posted revenue of $789 million, up 52 percent from a year earlier. It reported net income of $68 million, or $1.26 a share, also up from a year ago. The company also added nearly two million subscribers bringing its total to 25.56 million

The bad news? Netflix barely missed analyst expectations for the previous quarter. However, even worse than that was the company lowering its expectations for the current quarter, saying earnings per share should be around 72 cents and $1.07 cents a share. Analysts expected $1.09 a share. The reason for the lowered expectations is the price change.

In its third quarter, Netflix said "We will see only the negative impact of the pricing change, given that the announcement was early in the quarter and that the increases won't take effect until late in the quarter (September 15th on average). We expect domestic net additions in the [third quarter] to be lower than the previous year...and because of the timing of the price change, revenues will only grow slightly on a sequential basis," Netflix Chief Executive Reed Hastings said in a letter to investors.

Hastings is expecting better results in the fourth quarter, when the company gets a full slate of separate costs for DVD and streaming services.

However, analysts are cautious about Netflix's future.

"We believe it will be increasingly more difficult to support its high valuation in the face of headwinds tied to usage based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and subscriber acquisition costs. Furthermore, we are troubled by the company's streaming cost accounting and its limited disclosures in this increasingly volatile environment," Janney Montgomery Scott analyst Tony Wible said in a note.

The company barely addressed the backlash that came with the price change. In the same letter to investors, Hastings said "some subscribers" will cancel Netflix or downgrade but he doesn't expect it to be that many because of the deal's incredible "value."

Netflix's shares recently traded at $259.63, down 7.8 percent, or $22.

Follow Gabriel Perna on Twitter at @GabrielSPerna