Analyst: Netflix Facing ‘Uncertain’ Environment23 Aug, 2011 By: Erik Gruenwedel
Netflix’s pending (and expensive) streaming offensive in Latin America and beyond, coupled with the Hulu auction portends a challenging home entertainment landscape
As online disc rental pioneer Netflix continues with an aggressive international expansion of its all-you-can-eat streaming service, it also is entering a prolonged period of difficult earnings, according to an analyst.
Eric Wold, research director with Merriman Capital in San Francisco, said Netflix shares have dropped 26% in value since he downgraded the stock to a “neutral” rating on July 6. The analyst now is discounting further 10% to 20% Netflix’s stock valuation for 2012.
Principal culprits include burgeoning costs involved rolling out streaming service in 43 Latin American countries, Mexico and the Caribbean, and the unknown impact of a 60% monthly price increase (to $15.98 from $9.99) to select domestic subscribers beginning Sept. 1.
Indeed, many analysts say the price increase could see upwards of 15% of Netflix’s 25 million subscribers jettison the service in favor of other home entertainment alternatives such as Amazon Prime, kiosks and video stores — many of which offer pricing options that rival Redbox and Blockbuster Express.
Netflix CEO Reed Hastings and CFO David Wells, in the company’s most recent analysts’ call, confirmed that short-term subscriber loss was inevitable in the third quarter as a result of the price increase. In addition, Netflix’s most recent content deal with Telemundo for 1,200 hours of repurposed Spanish-language TV programming underscored the prolific spending required to launch streaming service across such a large region.
Indeed, correspondence with Netflix personnel revealed the company is focusing much of its resources and attention on the launch.
“Although there is the potential for increased gross profits per domestic sub depending on how the price increase takes hold and the shift in subscription type, we believe this is likely to be offset by increased launch costs and initial losses internationally along with the potential for higher marketing spend (subscriber acquisition costs) domestically,” Wold wrote in an Aug. 23 note. “Given an increasingly uncertain environment (both competitively and operationally), we believe it is prudent to be more conservative with our valuation multiple assumptions.”