http://beta.finance.yahoo.com/news/netflix-shares-crater-37-forecast-135322743.html
10/25/2011:
Netflix shares crater 37% on forecast
By
David B. Wilkerson,MarketWatch | MarketWatch – 2 hours 57 minutes ago
CHICAGO (MarketWatch) — Netflix Inc. shares plunged more than 37% in morning trading Tuesday, amid an avalanche of negative analyst comments following the video rental provider’s disappointing fourth-quarter outlook and its disclosure that international expansion would prevent profitability in the first half of 2012.
Netflix’s stock (XNAS:
NFLX -
News), trading near the $300 mark as recently as July, was down $44.09 at $74.74.
Analyst Tony Wible of Janney Capital Markets downgraded the stock to sell from neutral, offering a blistering indictment of the formerly high-flying company.
“We believe the [Netflix business] model is unsustainable, as the company faces rising costs that it hoped it could pass on to its [subscribers],” who appear unwilling to accept them, Wible wrote to clients. “The company has paid exorbitant prices for content while painting itself as a cheap rental service. Simply put, the company’s brand does not fit with its large/growing content obligations.”
Wible added that, at this point, following a disastrous third quarter in which Netflix made a number of uncharacteristic blunders, “investors would likely be reluctant to believe any good news (if any were out there), as management has lost the benefit of the doubt.”
Needham & Co.’s Charlie Wolf reiterated his underperform rating on the shares. “Netflix’s installed base of subscribers does not appear to be growing fast enough to cover the growth in streaming content costs [yet] the company plans to forge ahead with even larger streaming deals in 2012.”
Promotion for Netflix’s ill-fated plan to spin off its DVDs-by-mail service under the Qwikster brand name.
Arvind Bhatia of Sterne, Agee & Co. reaffirmed his neutral rating on the stock, saying the news that Netflix could lose as much as $500 million internationally next year was “by far the biggest negative surprise of the quarter,” given Netflix’s ability to turn a profit in just a year in the Canadian market.
Bhatia found slight cause for optimism: that 2012 “should be the trough year and earnings and earnings growth should resume in 2013 and beyond.”
“What we have here is one major reset,” wrote Mark Mahaney, an analyst at Citigroup, in a note to clients late Monday.
Mahaney said the outlook was “particularly disturbing” in its revelation of a decline in domestic streaming subscribers compared with the third quarter, which he said seems to indicate “both major misexecution and likely competitive pressures.”
Netflix said that earnings in the fourth quarter would be in the range of 36 cents to 70 cents a share, on revenue of $816 million to $845 million. Analysts polled by FactSet Research were expecting a profit of $1.05 a share on revenue of $923.7 million.
The disappointing forecast reflects greater-than-expected subscriber cancellations, for its DVD-and-streaming plans, DVD-only and streaming-only subscriptions, Netflix said.
“What we are seeing is a second wave of cancellations from the pricing increase,” said Chief Executive Reed Hastings, during a conference call with analysts.
“The first wave was in July, when we had the announcement. The second wave has been in September and October, as people become more aware of the price increase, and they change their plan or cancel. That wave has been declining very steadily over the past couple of weeks. So we have substantially less weekly cancels now than we did just three or four weeks ago.”
In streaming, net additions are looking to be down in October, about flat next month, and “strongly positive in December,” with the result that streaming additions will be slightly down for the quarter, Netflix said.
Hastings said the prediction for an uptick in December is based on what Netflix saw last year.
Reuters Netflix CEO Reed Hastings speaking during a session at the All Things Digital conference in Palos Verdes, Calif., in June.
At the end of the December period, Netflix expects to have about 20.8 million streaming customers, down from 21.4 million in the third quarter.
The company also plans to double the amount spent on content in 2012, about on par with Time Warner Inc.’s (XNYS:
TWX -
News) HBO unit. Hastings said Netflix expects its rate of streaming subscriber growth to outpace those costs.
Netflix said its third-quarter profit rose 63% from the same period last year, on a 42% increase in subscribers to its video rental services, topping most analyst estimates.
Net income for the quarter was $62 million, or $1.16 cents a share, compared with a profit of $38 million, or 70 cents a share, in the year-ago period.
Revenue rose 49% to $822 million. Analysts polled by FactSet Research were expecting a profit of 96 cents a share on revenue of $812.5 million.
In July, Netflix announced that it would raise the price for a combination DVD-and-streaming video plan to $15.98 from $9.99 a month — a 60% hike.
Hastings said he expected some negative reaction, but believed the popularity of the company’s streaming-only option would allow it to increase the fee for the combo plan.
Consumers were angrier than Netflix anticipated. In mid-September, it warned that it would generate about 1 million fewer subscribers than it expected when it gave its initial forecast in July. The shares plunged 19% on Sept. 15, the day of that warning.
In September, Netflix said it would spin off its DVD unit into a separate entity called Qwikster while retaining the Netflix brand for the streaming product, a move many analysts found baffling enough to be compared with Coca-Cola’s New Coke debacle of the 1980s.
On Oct. 10, Netflix reconsidered the move and said the DVD and streaming business would remain together under the original brand.