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Netflix stock plunges 25% after analysts slash estimates

July 25, 2012|By Ben Fritz
  • Shares of Netflix, led by CEO Reed Hastings, plummeted 25% Wednesday, a day after financial results were released.
Shares of Netflix, led by CEO Reed Hastings, plummeted 25% Wednesday, a… (David Paul Morris )

It's looking like another bad summer for Netflix.

One year after a sudden price hike and a bungled plan to establish a new DVD brand, the subscription video company’s stock is again plummeting.

It fell 25% on Wednesday, closing at $60.28.

This time the culprit is investors’ concern that domestic growth is slowing while management is moving too fast to expand overseas. Following disappointing news in Tuesday’s financial results, at least seven Wall Street analysts lowered their price target for the stock.

Wednesday’s drop took Netflix shares to their lowest point since early 2010. One year ago, they were trading at $281.53, 79% higher than Wednesday’s closing price.

In a letter to shareholders, Chief Executive Reed Hastings and Chief Financial Officer David Wells disclosed that Netflix will have to hit the high end of its third quarter guidance to reach a previously stated goal of 7 million new domestic streaming video subscribers in 2010.

In reports to clients Wednesday, many analysts expressed skepticism about this goal.

In addition, those analysts were not optimistic about Netflix's plan to plow most of the profits from its domestic business into international expansion over the next several years, which will keep it around break-even on a global basis.

Some were also concerned about competition from Amazon, Hulu, Redbox and cable providers, as well as the lower profit it is earning from streaming compared to DVDs.

"We believe Netflix faces risks tied to competition, a slowdown in sub growth, global expansion that will offset profitability for years, and cannibalization of the high margin DVD business," wrote Janney Capital Markets’ Anthony Wible.

This was the second quarter in a row in which Netflix's stock dropped precipitously on the day after financial results were released. In April, shares fell 14% as concerns about domestic streaming subscriber growth first flared.

Still, some analysts remained relatively optimistic compared to the stock's current dismal state. Lowered price targets by firms such as Credit Suisse and Barclay's Bank were $100 and $80 respectively, well above the stock’s Wednesday closing price.

And some said the issue was not whether Netflix is on the right path, but whether Wall Street will be suitably patient.

"We appreciate Netflix’s long-term vision and believe it is likely the right strategy going forward," wrote analysts at J.P. Morgan, "but limited profitability is likely to weigh on shares in the near-term."

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