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Poor Guidance Sinks Netflix Stock

22 Apr, 2008 By: Erik Gruenwedel

Wall Street showed little compassion for Netflix Inc. just a day after the online rental pioneer reported strong results, including record subscriber growth.

Analysts reacted negatively to news the Los Gatos, Calif.-based company would lower full-year earnings-per-share projections due to ongoing efforts to stream movies to the PC.

Shares of the DVD-by-mail service plummeted nearly 24% April 22 to $30 per share in afternoon trading — less than a week after achieving record highs.

Netflix, which said it has 9,000 titles available for streaming, has not revealed exact costs, including license rights, associated with the Instant Watch service.

CFO Barry McCarthy suggested, however, that those costs had exceeded analyst projections.

Co-founder and CEO Reed Hastings said as much April 21 when he told analysts, “Providing free access to content is not a long-term formula for profitable growth.”

Rick Munarriz with online analyst The Motley Fool admitted the bloom was off “Netflixland.” He said margins would be tested as Netflix continued to formulate its digital channel — a strategy, the analyst contends might be for naught.

“In five years, is there any reason to believe that the movie studios themselves won't be the ones dealing directly with the end users?” Munarriz said.

Indeed, Hastings said Netflix would begin charging subscribers a monthly premium (believed to be $1-to-$2) for Blu-ray movies, which currently represent a single digit percentage of all rentals.

He cited higher acquisition costs for Blu-ray titles compared to standard DVD for the increase.

“All it takes is a tiny report to change the mood,” said Aaron Task with Yahoo's Tech Ticker. “The first quarter was very good, but [they] bombed their guidance for the rest of the year.”

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