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Analyst: Netflix to Post $7 Million Q4 Loss

15 Jan, 2013 By: Erik Gruenwedel

Content spending obligations could top $6 billion following Disney deal

Netflix is projected to post a fourth-quarter (ended Dec. 31) net loss of $6.9 million, as costs associated with ongoing foreign expansion, big-ticket content license agreements and conservative subscriber gains undermine the subscription video-on-demand pioneer’s bottom line, according to B. Riley & Co. analyst Eric Wold.

Netflix reports fourth-quarter results Jan. 23.

The rental service, which cut 2012 year-end domestic subscriber growth projections from 7 million to about 4 million at the end of the third quarter, is expected to add 1.4 million domestic streaming subs (to 25.2 million total), lose 700,000 disc subs (to 7.8 million) and add 900,000 international streaming subs (to 4.6 million total), according to Wold’s Jan. 15 note.

The analyst expects Netflix to downsize subscriber growth projections in 2013 after dealing with yearlong scrutiny following last year’s optimistic guidance. Additionally, the loss of disc subs is noteworthy since Netflix derives most, if not all, of its operating profit from physical and hybrid streaming subs.

“Our current projection for 2013 domestic streaming subscriber additions is 3.5 million,” Wold wrote.

The analyst, who is bullish on the pending launch of Redbox Instant by Verizon, said continued high-profile content license deals announced by Amazon Prime Instant Video and ubiquitous access to programming — notably repurposed TV shows — on third-party sites, challenge Netflix’s bottom line.

“We believe the building competitive pressures in 2012, even without Redbox Instant, was driven by the launch and expansion of other bundled offerings and the ubiquitous availability of content — a phenomenon that is only likely to build further in 2013,” Wold wrote.

In addition, Netflix’s highly publicized landmark pay-TV license deal with Disney (which begins in 2016), could significantly ramp up the SVOD service’s content license cost obligations by as much as $1.5 billion on top of the $5 billion in total content spending already announced, the analyst said.

“Without a doubt, Netflix needs to spend on, and commit to, streaming content ahead of the subscriber curve — but the question will be whether or not demand of Disney content (which represented 2% of streaming demand less than a year ago) will be enough to cover the increasing costs,” Wold wrote.

The analyst, who is maintaining a “sell” rating on Netflix shares, believes the stock should be valued at $45 a share, which 128% below the stock’s current price of $103 per share.

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