Israel's 2013 Elections
The worst news for Netanyahu is that his own Likud-Yisrael Beiteinu joint list looks to have just over 30 seats, down from 42 currently. However, that is still more than the 27 Netanyahu's party commands in the current Knesset which, truth be told, has only 65 Knesseteers in a hypothetical right bloc. These election results are only a disaster for Netanyahu when set against early expectations that Likud-Yisrael Beiteinu would approach 50 seats as part of a right bloc well over 70.
Having a smaller number of Knesseteers in his own faction means it will be less dominant in the eventual coalition than it could have been otherwise, but Netanyahu has never preferred to govern entirely with right-wing parties, as seen in his courtship of Labor and Kadima during this past term. Because of this, he probably welcomes the chance to work with Yair Lapid's Yesh Atid party and its apparent 18-19 seats. That party seems to have a mostly ill-defined mushy centrism of the sort centrist third party movements in the United States routinely tap. The other two parties that seem logical partners are Jewish Home and Shas. Only one of those is needed, but Netanyahu will certainly reach out to both.
Such a government would be effective at pursuing hardline policies toward the Palestinians with the aim of ensuring any eventual nominal state serves primarily Israeli needs. The biggest fissure in the coalition will be over Haredi privileges, and that is what will probably bring it down in a couple of years. In fact, I don't see any way Likud could lead a government that addresses the issue in the current Knesset, unless Labor changes its tune on whether it will join a Netanyahu-led government. The best hope would be a compromise involving alternatives to military service that has the support of Jewish Home.
In short, Netanyahu's bloc failed to meet expectations and the new government will probably last for only a couple of years, but this is far from the near-defeat for the incumbent prime minister some are presenting.
UPDATE: This will, incidentally, be the first time Netanyahu has formed a government at the head of the largest Knesset faction. Likud has one fewer seat than Kadima in the current parliament, while in 1996 he won a separate election for prime minister even though Labor had more MKs.