Netflix's global march puts investors on pause

LOS ANGELES Mon Oct 22, 2012 4:15pm EDT

A Netflix disk envelope is displayed in Encinitas, California, July 25, 2011. REUTERS/Mike Blake

A Netflix disk envelope is displayed in Encinitas, California, July 25, 2011.

Credit: Reuters/Mike Blake

LOS ANGELES (Reuters) - Netflix Inc launched its subscription video service in 49 countries in a little more than a year, a push that has left Wall Street analysts wondering if the company is trying to expand its reach too quickly.

Last week, the Los Gatos, California-based company began offering on-demand movies and TV shows in Scandinavia, a region Chief Executive Reed Hastings called a battleground for television delivered over the Internet. The company competes there with premium cable network HBO, which is starting to sell online subscriptions to its programs.

The move into parts of Europe, Latin America and the Caribbean comes at a visible cost. Netflix is expected to report a third-quarter profit of 5 cents per share when it releases results on Tuesday, according to Thomson Reuters I/B/E/S. But Hastings warned in July the company will plunge back into the red for the last three months of the year as a result of its international spending, the second quarterly loss this year.

"My big concern is they are in a phase of profitless prosperity, that all the money they make domestically is going to be aggressively reinvested in international expansion," said Dougherty & Co analyst Steve Frankel, who rates Netflix shares "neutral."

On October 9, Moody's Investors Service put Netflix debt on review for a potential downgrade, citing the move into international markets and "increased vulnerability" to competition for the U.S. streaming business that holds the biggest number of subscribers.

The same day, Hastings announced he would resign his board seat at Microsoft Corp to focus on Netflix.

Netflix shares have fallen 44 percent from a year ago, when the company warned that international expansion would require temporary financial losses.

While the strategy "makes sense for the long term," Frankel said, the scenario "is certainly not one you are going to get a lot of investors excited about."

Morningstar analyst Michael Corty said Netflix was "overextending" by entering so many foreign markets.

"The domestic business is competitive enough," said Corty, who rates Netflix a "sell." "They need to put as much resources and capital into the domestic business as they can."

CEO Hastings argues temporary losses are worth the investment to seize a "once-in-a-generation" opportunity to enter new markets early. Each time it takes a loss, Netflix will return to making a profit before it moves into another region, he said.

Early subscriptions in the Nordic countries exceeded expectations, Hastings said in an interview in Helsinki, where he was promoting the new Netflix service in Finland. The company will focus on that region "for the next few quarters" and has not cemented plans to enter other countries, he added.

"Nordics is becoming the global battleground for inventing the Internet television," Hastings said.

To help finance more moves abroad, Netflix needs to keep adding new subscribers to its $8-a-month streaming service in the United States, analysts said.

On Tuesday, investors will look for guidance on whether the company will meet its target of 7 million new U.S. streaming customers this year. Hastings cautioned in July that the goal might be difficult to achieve.

The company provided guidance ranging from a 10 cents-per-share loss to a 14 cents-per-share profit.

Only seven of 35 analysts who follow Netflix rate it a buy, according to Thomson Reuters data. Shares have gained 19 percent in October, closing at $64.98 on Nasdaq on Friday, but are still 44 percent below their level a year ago.

Two analysts recently issued favorable reports about the company's future. One investor who famously shorted Netflix, T2 Partners hedge fund manager Whitney Tilson, reversed course and touted the company as one of his best stock ideas.

Morgan Stanley analyst Scott Devitt, who upgraded shares to the equivalent of a "buy" on October 8, said Netflix faced less competition than expected, particularly from Amazon.com Inc, and the company had the chance to become "the global video platform."

"The international opportunity is a risky bet," Devitt said in a note to clients. "But Netflix remains the only pure-play streaming service with global ambitions. If anyone wins on a global scale, it will be Netflix."

(Reporting By Lisa Richwine; Additional reporting by Jussi Rosendahl in Helsinki; Editing by Ronald Grover and Diane Craft)