Netflix Bears Circle the Cave

24 Jan, 2013 By: Erik Gruenwedel

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The day after Netflix handily beat Wall Street estimates, including trumping projected modest subscriber gains and a fiscal loss, some analysts are trying to make sense of it all.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said much of Netflix’s surprising 2 million domestic subscriber growth in the fourth quarter was due to the fact it remains the “killer app” on many consumer electronics devices, including tablet computers. Pachter said higher visibility and easier access also contributed to the subscription video-on-demand leader topping 6 million subs internationally for the first time.

Regardless, the analyst had expected noted Netflix investor Carl Icahn to jettison his 10% stake prior to the fiscal results release.

“So much for my ‘Icahn's out of Netflix’ analysis,” Pachter tweeted Jan. 24.

Indeed, Icahn, who acquired his stake last year for $54 a share, has since seen his investment increase about $450 million in value on paper. The maverick investor, who is known for his acerbic tact toward the management of companies he acquires interest in, believes Netflix shares have room for growth.

“We still own every share we bought and we believe it’s still got tremendous potential,” Icahn told Bloomberg News.

Regardless, Pachter expects Netflix to lose more than 10% of its content next year as it attempts to rein in content costs, meaning that the decline in existing content will more than offset contribution from new original content. He says that will lead to a decline in the quality of the typical sub’s viewing experience.

“Therein lies the rub: Netflix can only improve the typical viewing experience for next year by increasing its content spending, negatively impacting profitability further,” Pachter wrote in a Jan. 24 note. “Given its apparent commitment to operating its overall business at break even or better, Netflix is unlikely to  do this, as higher content spending would limit its ability to continue its international expansion.”

Meanwhile, Eric Wold, analyst with B. Riley Caris in Los Angeles, said Netflix’s better-than-expected results represented more of a short-term pyrrhic victory than a momentum shift in the business.

“We continue to believe increasing competition from bundled offerings and combination subscriptions [i.e. Redbox Instant] poses a risk to domestic subscriber growth, which would cause a reverse in operating leverage and negatively impact the company’s ability to self-fund its international growth plans,” Wold wrote in a note.

Nonetheless, Wold doubled his Netflix share price target to $90 from $45 while maintaining a “sell” rating on the stock.

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