Netflix shares dive as analysts cut targets

Wed Oct 24, 2012 5:28pm EDT

A sign is shown at the headquarters of Netflix in Los Gatos, California September 20, 2011.REUTERS/Robert Galbraith

A sign is shown at the headquarters of Netflix in Los Gatos, California September 20, 2011.

Credit: Reuters/Robert Galbraith

(Reuters) - Shares of Netflix Inc sunk as much as 16 percent on Wednesday as analysts cut price targets and warned emerging competition will threaten growth of the company's U.S. movie and TV streaming service.

Netflix on Tuesday cut its year-end forecast for new subscribers by 2 million. CEO Reed Hastings said the company had miscalculated how quickly it would grow in the young and fast-changing Internet TV market.

Shares of Netflix tumbled as much as 16 percent on Wednesday. In afternoon trading, Netflix was down 12 percent at $60.07 on Nasdaq.

"The lower numbers should lead investors to question the total addressable market, especially as this slowdown is in an ideal environment lacking material competition that will likely soon emerge," said Janney Capital Markets analyst Tony Wible.

"Every subsequent quarter has the potential to intensify the competitive risks," said Wible, who cut his price target to $48 from $53. He rates Netflix "neutral."

Other analysts reduced targets by around $5 to between $48 and $65. BMO Capital Markets slashed $22 off its target to bring it in line with the top of that range.

Wible pointed to a possible rival product from Apple Inc and the expected fourth-quarter launch of video services by Verizon Communications and Coinstar Inc's Redbox.

The Netflix stock, which traded at $304 in July 2011, has slumped after the company imposed an unpopular price hike, faced new competition and increased spending on new content and an international expansion.

In a note titled 'No catalyst/No cure,' Stifel Nicolaus analyst George Askew said Netflix's business model was broken as the streaming business lacks barriers to entry.

"Aggressive companies like Amazon, Verizon and Comcast have set their competitive sights on the online streaming business and have other revenue sources to subsidize it," Askew said.

"We believe fiscal year 2013 will be another eventful and probably frustrating year for Netflix."

CASH BURN

Netflix is using profits from its U.S. business to fund expansions into new markets. The company said it will take a loss in the fourth quarter as it sets up new service in the Nordic region.

At the same time, Netflix is spending more to create its own original programming. Free cash flow was a negative $20 million in the third quarter that ended September 30.

Netflix said it will continue to burn cash for several quarters but that it does not need to raise money.

"But its recent slip up in guidance, and willingness to spend, creates risk that this view changes," said Lazard Capital Markets analyst Barton Crockett.

Crockett expects the company's cash to fall to $450 million in 2013 from its current $800 million.

Even analysts who have a "buy" rating on Netflix lowered their price targets.

"While we continue to believe Netflix represents an incredibly compelling entertainment value, the pace of adoption of streaming video in general, and Netflix specifically, appears likely to be meaningfully slower than we previously anticipated," said Pacific Crest Securities analyst Andy Hargreaves, who cut his target to $85 from $130.

(Reporting by A. Ananthalakshmi in Bangalore and Lisa Richwine in Los Angeles; Editing by Supriya Kurane and Marguerita Choy)

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