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Fallout Continues on Netflix Subscriber Concerns

27 Oct, 2008 By: Erik Gruenwedel

Shares of online DVD rental pioneer Netflix Oct. 27 closed below a 52-week low as investors continued to react negatively to lower subscriber estimates.

In a financial call last week, Neflix co-founder and CEO Reed Hastings said year-end subs would range from 8.85 million to 9.15 million compared to previous estimates of 9.7 million.

Citing a “markedly deteriorated” economy, Hastings said new subscribers in the current quarter had already fallen 30% compared to the same period last year.

“The current economic recession means continued subscriber growth … but not as fast as last year,” he said.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said Netflix’s stock slide was more a result of a weak market than concerns about softer subscriber growth.

“The market hates all stocks with consumer exposure [right now], so you're seeing all retailers getting killed,” Pachter said.

Independent analyst Rob Enderle said Netflix is tied at the hip with consumer spending, which he said for the first time in a lot of households is being prioritized.

He said expenses such as food and utilities will top the list of must-have and services like Netflix will fall towards the bottom.

“Getting new customers, particularly this quarter, will be an elusive goal and I think the market is reflecting that,” Enderle said.  

Pachter said it is not just DVD that will feel the pinch. He said the video game industry, traditionally a strong market entering the holiday shopping season, is under pressure.

“Nobody is doing better than [video game retailer] GameStop, and yet it's stock is down to $25 from a high of $63,” Pachter said. “Netflix is suffering the same fate.”

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