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Netflix Stock Sinks On Mixed Reviews Of ‘Arrested Development’

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(L-R) Will Arnett & Jason Bateman in a scene from "Arrested Development." (credit: Netflix)

(L-R) Will Arnett & Jason Bateman in a scene from “Arrested Development.” (credit: Netflix)

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LOS GATOS (CBS/AP) – The hoopla surrounding the return of “Arrested Development” on Netflix’s Internet video service has quickly dissolved into a letdown on Wall Street.

Netflix’s stock fell by more than 6 percent Tuesday as investors reacted to critics’ mixed reviews over the weekend of the first new “Arrested Development” episodes since Fox canceled the TV series seven years ago. The shares shed $14.55 to close at $214.19, marking the biggest one-day drop in the stock in nearly six months.

IDC analyst Greg Ireland characterized Tuesday’s sell-off as an overreaction, given that it’s far too early to know whether Netflix’s latest high-profile foray into original programming will turn out to be a hit or a flop for the company. That determination probably won’t be made until late July, when Netflix Inc. typically announces the number of subscribers it added during the April-June period.

Netflix declined Tuesday to disclose any information about how many and how much subscribers have watched “Arrested Development” since all 15 new episodes were released at once early Sunday morning. The mass debut made it possible for Netflix’s 29.2 million U.S. subscribers to watch as many episodes as they wanted during the holiday weekend as part of their $8-a-month subscription fee. Many people opted to view them all at once rather than space them out over weeks or months.

“Arrested Development” is the third original series to debut this year on Netflix, but it has attracted far more attention than the others because of its built-in fan base and a popular cast, which includes Jason Bateman and Michael Cera.

Netflix also raised hopes for “Arrested Development” by predicting the series could help add as many as 880,000 U.S. subscribers to the online video service during the three months ending in June. That would be 350,000 more subscribers than the service gained during the same stretch last year. It’s traditionally a sluggish period for the company because more people are on vacation and doing things outdoors instead of spending a lot of time watching video.

The Los Gatos, Calif., company didn’t make any of the new “Advanced Development” episodes available for advance viewing. That made it impossible to know ahead of time whether the series retained the same quirky humor and appeal that won the show critical acclaim, Emmy awards and a devoted fan base during its three-year run on Fox and its subsequent distribution on Internet video services such as Netflix.

Once they saw the resurrected “Arrested Development,” some influential critics panned it as a disappointment. The New York Times was particularly harsh, asserting that Netflix had “killed” the series. Variety was only slightly kinder in describing the revival as “an interesting idea that was more exciting on paper.”

But many other critics hailed the new episodes for being just as good, if not better, than the show’s original incarnation. “The comedic payout begins to multiply with each succeeding episode,” asserted The Hollywood Reporter’s Tim Goodman, who recommended watching the new season at least twice to get all the jokes. Other reviewers in daily newspapers scattered across the country also praised the series.

As of late Tuesday afternoon, “Arrested Development” had received a 72 rating on a scale of 100, based on 10 professional reviews analyzed by Metacritic.com. That compared with a rating of 76 for the political drama “House of Cards” and 46 for the thriller “Hemlock Grove,” the other Netflix-financed series released on the service this year. Metacritic considers a 72 rating to signify “generally favorable reviews.”

The opinions of the critics ultimately won’t matter if Netflix’s subscribers are enjoying the new episodes of “Arrested Development,” Janney Montgomery Scott analyst Tony Wible said.

The show becomes “almost like a marketing vehicle for Netflix” as satisfied customers keep their subscriptions and help create a buzz that attracts new subscribers, Wible said.

Just a whiff of negative sentiment about “Arrested Development” was enough to spook Wall Street. Many investors have been betting that the series will accelerate Netflix’s subscriber growth and provide further validation of the company’s decision to spend about $200 million annually on original programming in an effort to make its Internet video service as compelling as any broadcast or cable TV network.

The buildup to “Arrested Development” helped Netflix’s stock recover from a backlash to price increases and proposed service changes announced nearly two years ago. The stock plummeted from nearly $305 in July 2011 to below $53 last August. Even with Tuesday’s sharp decline, Netflix’s stock has more than doubled in value so far this year.

The run-up has left investors paying about $144 for every $1 in Netflix’s projected earnings this year compared with $23 for every $1 in anticipated earnings for Google, the Internet’s most powerful company. Netflix’s lofty valuation means the slightest stumble can cause many investors to dump their shares, Wedbush Securities analyst Michael Pachter said. “It’s a stock that is priced for perfection.”

A sampling of traffic Sunday indicated that “Arrested Development” got off to a positive start, despite the misgivings of some critics.

Procera Networks, which provides Internet traffic management for broadband providers, estimated that about one-third of the Netflix subscribers it monitored watched at least one episode of “Arrested Development.” Procera monitors traffic on several major broadband providers, though it doesn’t identify which ones. The traffic for “Arrested Development” was far better than the 11 percent of Netflix subscribers who watched at least one episode of “House of Cards” during its debut weekend in February, according to Procera.

Netflix credited the popularity of “House of Cards” for helping its service add 2 million U.S. subscribers during the first three months of this year, about 250,000 more than the same time last year.

About 10 percent of the Netflix subscribers monitored by Procera finished the entire season of “Arrested Development” on Sunday.

“I would call that a numbers success, regardless of critical acclaim,” Cam Cullen, Procera’s vice president of global marketing, wrote Tuesday in a blog post.

(Copyright 2013 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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