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Analysts Focus on Netflix Subs, Not Suit

6 Oct, 2005 By: Holly J. Wagner

Analysts seemed unconcerned by Netflix's disclosure that it expects to pay $3 million to $4 million to settle a lawsuit over delivery times, nipping at its profit potential for the third quarter. They instead focused on subscriber growth and churn.

Netflix reported Sept. 29 that it will grow its subscriber base, but still expects to report lower net income in the third quarter after paying a settlement in a class-action lawsuit alleging false advertising, unfair and deceptive trade practices, and breach of contract regarding DVD delivery times. Netflix denies any wrongdoing, and the court still must approve the settlement.

Wedbush Morgan Securities analyst Michael Pachter put a $6.50 price target on the stock and maintained his “sell” rating because he still questions the future for Netflix.

“While we admit that Netflix has executed its plan well and has maintained high subscriber additions, we remain concerned about its long-term prospects,” he wrote. “We expect Netflix to continue attracting customers until the addressable market is exhausted. Once investors see that net-subscribers-lost continues to increase and gross subscriber additions begin to subside, we think Netflix shares will begin a steady decline.”

Netflix executives expect the company to end the quarter with between 3.59 million and 3.61 million subscribers, revised up from 3.35 million to 3.50 million.

“At this stage in Netflix's development, we believe subscriber growth is the key indicator under the assumption that the more subs Netflix can sign up now, the less there will be for the competition to get,” wrote Dennis McAlpine, of McAlpine Associates. He put a “buy” on Netflix stock, but he also noted that Netflix did not address churn in its statement. He also mentioned that financial guidance didn't change despite higher subscriber projections, which would mean each subscriber is generating less revenue.

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