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Analyst: Netflix to Gain 6.2M Subs Through First Quarter


By : Erik Gruenwedel | Posted: 11 Dec 2009

Spurred by recent $100 price deductions to the Xbox 360 and PlayStation 3 video game consoles, respectively, Netflix is projected to add 6.2 million new gross subscribers from fourth-quarter 2009 through first-quarter 2010, according to Eric Wold, analyst with Merriman Curhan Ford.

Wold, who covers the Los Gatos, Calif.-based online DVD rental pioneer, based his estimate on the fact that Netflix added 1 million subs, or 22% of total subs through the same aforementioned period, following the initial launch of its streaming service on the Xbox.

“With the 3.4 million new Xbox 360 console owners since last December and November’s 9.3 million installed base for PS3 (the same month Netflix bowed on PS3), we believe Netflix will once again be successful this holiday season in signing up a significant number of new subscribers,” Wold wrote in a Dec. 11 note.

Netflix continues to make its Watch Instantly streaming service a cornerstone to new subscriber acquisitions and retaining members. While continuing to invest heavily in technology and content for the electronic channel, Netflix heretofore does not charge subscribers a premium to access streaming.

This marketing strategy could affect Q1 earnings, according to World, who believes the surge in new subs will increase marketing costs and negatively impact revenues and gross profit.

“Although management warned about the risk to Q1 consensus estimates on the Q3 conference call, we believe [earnings per share] estimates may still be too high,” Wold said.

The analyst said that despite raising 2010 and 2011 earnings per share estimates and factoring in the potential console sub surge over the next 12 months, Netflix shares have reached a “potential value” range.

“We believe the risk of conservative guidance for Q1 overshadows these and would recommend waiting for a better entry point or for the risk to pass,” Wold said, maintaining a “neutral” stance on Netflix shares.


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