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Analyst Recommends Selling Netflix Shares

By : Erik Gruenwedel | Posted: 14 Jan 2010

Netflix shares fell more than 5% in midday trading Jan. 14 after an analyst downgraded the Los Gatos, Calif.-based company to “sell” from “hold.”

By comparison, rival Blockbuster’s shares surged more than 9% after the Dallas-based chain said it had eliminated $24 million in letters of credit held by former parent, Viacom.

Citing “noise potential” or potential problems in Netflix’s forthcoming fourth-quarter results, Barton Crockett, analyst with Lazard Capital Markets in New York, became the fourth analyst since November to temper the outlook on one of Wall Street’s lone stars during the recession.

Specifically, Crockett questioned whether the online DVD rental pioneer could maintain its “torrid” subscriber growth, even with this week’s announcement of a streaming deal with the Nintendo Wii and last year’s Sony PlayStation 3 accord.

The analyst expects Netflix to report about 200,000 new subscribers, which is on the low end of projections — or a total of about 12 million subs compared to 12.3 million.

Crockett cited a 5% decline Netflix’s online traffic in the fourth quarter, compared to the third quarter, and 11% decline with Q2 (as reported by comScore), as a potential “headwind” for shares going forward.

“Longer term, we are skeptical that online streaming via PS3, Wii and [Blu-ray players] — the company’s current focus — will drive sub growth that matches the [1 million] lift in 2009 from the Xbox 360 partnership,” Crockett wrote in a note.

He said Xbox users are more inclined to go online compared with PS3 and Wii users.

Indeed, Michael Pachter, analyst with Los Angeles-based Wedbush Morgan Securities, said the Wii deal would have less traction since it is not a DVD or Blu-ray Disc player (requires a separate adaptor).

“I don’t see the Wii driving significant growth for Netflix,” Pachter said, adding, however, that he believes the company will “easily” meet its sub projections.

Finally, Crockett concurred with other analysts who feel Netflix could lose consumer value after it agreed to delay receiving new releases for 28 days from Warner Home Video.

“If video stores and kiosks step up marketing of a ‘rent it here first’ approach, we believe they could sap some of the consumer demand for Netflix,” Crockett wrote.


User comments

Commented by 2Soon
Posted on 2010-01-15 08:20:21

I find this hard to believe seeing as Wii just began it's streaming netflix as did PS3 and not many if any (I just learned about it last nite) know about this feature. All netflix needs is to better it streaming catalog and the shares should go back up if not better. Where did this analysis go to school?


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