Netflix Needs Surge for Goal of 7 Million New U.S. Users

Netflix Inc. (NFLX) Chief Executive Officer Reed Hastings said in March the world’s largest online video service would add 7 million U.S. customers this year. Investors find out today if he still has a chance.

Netflix, which reports third-quarter results after markets close, must add close to 1.8 million U.S. online subscribers to stay on schedule, Hastings said in July. Analysts predict 1.43 million new customers for a total of about 25.4 million U.S. users, the average of 10 estimates in a Bloomberg survey.

“Investors already expect Netflix to lower its domestic streaming subs guidance from 7 million,” Arvind Bhatia, an analyst with Sterne Agee & Leach Inc., wrote on Oct. 18. “The question is really by how much?” The analyst, who has a neutral rating on the shares, expects the company to add 6.2 million U.S. streaming subscribers in all of 2012.

Netflix shares have whipsawed as investors weigh how fast it can grow, closing up or down more than 10 percent on three days this month. The Los Gatos, California-based company needs profitable domestic subscriber growth to fund overseas expansion. Hastings introduced the streaming service in Scandinavia last week.

None of the analysts surveyed expect Netflix to reach its full-year target for U.S. users. With 2.27 million signed up in the first half of 2012, the company must add 4.73 million in the second half to make its goal -- and reach 28.7 million. It has posted similar six-month gains only twice in its history.

“Netflix remains a ‘show-me’ story in the back half of 2012,” Douglas Anmuth, an analyst with JPMorgan & Chase Co., said in an Oct. 19 research note. “Competition from Amazon, Hulu and TV Everywhere continues to increase.” He has a neutral rating on the stock.

Analysts’ Estimates

Analysts predict third-quarter profit will drop to 5 cents a share, the average of 29 estimates compiled by Bloomberg, from $1.16 a share a year earlier, a reflection of the international expansion that Hastings is funding with the U.S. business.

Sales for the quarter are forecast to increase 10 percent to $904.9 million, the average of 29 analysts’ estimates, from $821.8 million a year earlier. Of 37 analysts who follow the company, 8 recommend buying the stock, 8 say sell and 21 have hold ratings.

In July, Netflix predicted third-quarter sales of $890 million to $911 million, and results ranging from a loss of $6 million, or 10 cents a share, to profit of $8 million, or 14 cents.

Netflix fell 0.3 percent to $67.70 at 12:10 p.m. in New York. The stock had declined 2 percent this year through yesterday, after dropping 61 percent in 2011.

‘Time Bomb’

In July, Hastings said heavy viewership of the Olympics might reduce domestic subscriber growth. In the next few months, Netflix will face new U.S. competition from Redbox Instant, a joint venture from Verizon Communications Inc. (VZ) and Coinstar Inc. (CSTR)’s Redbox, along with continued pressure from rival streaming services by Amazon.com, Hulu LLC and cable’s TV Everywhere options, such as HBO Go, which lets customers watch online.

Depending on third-quarter growth, Netflix would have to add as many as 3.73 million domestic subscribers in the final three months to meet its annual target, said Michael Pachter, a Wedbush Securities Inc. analyst who has an “underperform” rating on the stock.

Netflix shares are a “ticking time bomb,” Pachter wrote on Oct. 16. “The company is highly likely to miss its domestic streaming subscriber guidance of 7 million, likely by 1 to 1.5 million subscribers.”

DVD Trial

Pachter estimates today’s report will show 1 million U.S. customers added in the third quarter, the lowest of those surveyed. Sterne Agee’s estimate of 1.6 million new third- quarter subscribers is the highest of the 10.

The company is taking additional steps to shore up its domestic business, moves that could bolster investor sentiment even if Netflix, as expected, retreats from the full year forecast.

Since August, new users to the company’s streaming service have had the option of checking a box that adds a broader selection of DVDs to the mix. The combined service costs $15.98 after a month’s free trial.

That marks a change from a year ago, when the company’s effort to create separate mail-order and streaming businesses triggered a shareholder revolt and subscriber losses. Netflix recently upgraded software and other technology, making it easier to activate both services, according to Jonathan Friedland, a spokesman.

“The streaming service isn’t adequate for a consumer to get all the movie and TV content they need because you still need to get newer releases through another service like Redbox or iTunes,” said Michael Olson, an analyst with Piper Jaffray Co. in Minneapolis who has a hold rating on the stock. “Encouraging people to go back to a hybrid plan enables you to get everything you need from Netflix.”

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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