Since we discussed earlier in September, Netflix’s decision to separate the DVD business and raise prices has gone drastically wrong, resulting in massive losses in stock. Mark Gongloff’s blog discusses the worsening situation over the past few days, the company’s dwindling future. Following its drastic drop of 15% and loss of 810,000 subscriptions on Monday, the situation has continued to deteriorate, resulting in a 37% from yesterday’s closing; $118.84 to a mere $75 per share. Goldman Sachs has decided to downgrade Netflix from a buy rating to neutral due to its recent troubles; both future success and profitability seem to be in doubt. The business had failed to recognize that with such a competitive emerging market, its services were price elastic.
While this may not seem to affect the assets or increase liabilities of the company, at least not in the accounting sense, these setbacks represent a severe drop in shareholder’s equity. As stocks measure the worth of the company, the investors have suffered heavy financial losses. Since the accounting equation has shareholders equity equaling assets and liabilities, this represents a corresponding reduction in the available assets for recovery.