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Netflix’s Calm Before the Storm?

23 Jan, 2012 By: Erik Gruenwedel

Rental service shed more than 3.5 million disc subs in the fourth quarter, an analyst said

When Netflix reports fourth-quarter results at the market close Jan. 25, it will do so with shares up nearly 40% from last November’s public-relations-fueled nadir, the launch of service in the United Kingdom and Ireland, and a modest rebound in subscriber growth.

The streaming pioneer also faces significant challenges in 2012 — not the least of which include costs associated with the aforementioned international expansion, and the billions it is spending keeping content relevant and unique.

Netflix this month also was slapped with a class-action lawsuit alleging select senior executives cashed in lucrative stock options while misleading investors.

The result is that some analysts contend the Los Gatos, Calif.-based subscription video-on-demand service could see losses greater than projected in 2012.

Michael Pachter, with Wedbush Securities in Los Angeles, said he is projecting a first-quarter loss of 62 cents per share — more than double the industry estimate of 29 cents per share. Pachter expects Netflix to lower fiscal year earnings estimates down another $1 per share.

“While Netflix may increase subscribers in 2012, it is paying a steep price to do so, triggering overall losses for the year compared to more than $4 a share in 2011 profit,” he wrote in a Jan. 23 note.

The analyst, who is maintaining an “underperform” rating on Netflix’s stock, said the service lost from 2.63 million to 3.63 million disc subscribers in Q4 — or from 8 million to 9 million disc subs in the second half of 2011.

The majority of those subs favored the hybrid disc and streaming program that Netflix raised monthly premiums 60% last October — triggering an exodus of subscribers.

“Massive attrition of its most profitable subs, coupled with increased spending on content, likely forced Netflix to raise capital at less-than- optimal terms,” Pachter wrote.

Indeed, Tony Wible, with Janney Capital Markets in New York, said the large loss of disc subs underscored a decline in Netflix’s largely overvalued packaged media segment, among other concerns.

“There are still a massive number of negative catalysts on the horizon,” Wible wrote in a note.

Michael Olson, analyst with Piper Jaffray, countered that the stock resurgence indicates a return to normalcy among Netflix’s investors, and that sub turnover will steady with gross additions returning.

FactSet Research estimates Netflix will earn 54 cents a share on $857.4 million in sales for Q4, which ended Dec. 31.

Netflix shares Jan. 23 closed down more than 6% to $93.96 per share.

About the Author: Erik Gruenwedel

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