Netflix Inc., the mail-order and online movie-rental service, fell in Nasdaq trading after an analyst downgraded the stock, saying increased competition and a push into the international market will force it to spend more.
Tony Wible, an analyst with Janney Montgomery Scott LLC, cut his rating on the shares to “sell” from “neutral,” based on his target price of $170, which is 26 percent below today’s close. Netflix fell $22.76, or 9 percent, to $228.91 at 4:30 p.m. New York time on the Nasdaq Stock Market. It has gained 30 percent this year.
The Los Gatos, California-based company’s shares already were under pressure after its second-quarter profit forecast missed analysts’ predictions on greater-than-expected international expansion costs.
“The number of headwinds is starting to mount,” Wible told Bloomberg Television, citing competition in the U.S. and costs to secure content and begin service in international markets.
Costs related to growth outside the U.S. may increase second-half international operating losses to as much as $70 million, up from a previous forecast of $50 million, the company said. Netflix plans to expand beyond Canada into two new countries by early 2012. The company also is spending to gain rights to films and TV shows outside the U.S.
“Streaming content costs are up substantially, and it’s coming as a surprise to a lot of investors,” said Michael Pachter, an analyst with Wedbush Securities in Los Angeles who has an “underperform” rating on the shares. “The company might not be as profitable as some people thought.”
Net income in the current quarter will be $50 million to $62 million, or 93 cents to $1.15 a share, the company said yesterday in a statement. Netflix projects sales of as much as $798 million. Analysts had estimated profit of $1.18 a share on revenue of $767.5 million.
For the first quarter, net income grew to $60 million, or $1.11 a share, from $32 million, or 59 cents, a year earlier, Netflix said. Sales increased 46 percent to $719 million, beating analysts’ projections of $706.1 million. They had predicted profit of $1.07 a share, the average of 24 estimates in a Bloomberg survey.
The company signed up 3.59 million new users to reach 23.6 million worldwide, near the top of its predicted range.
“The Canadian adoption of Netflix has been phenomenal,” Chief Executive Officer Reed Hastings said in an interview. “Our adoption of pure streaming in the U.S. at $7.99 has been amazing, so we think we have good prospects for international expansion.”
The company is also likely to focus its efforts on fending off increasing competition from streaming services offered by Amazon.com Inc. and Hulu.com, George Askew, a Stifel Nicolaus & Co. analyst who has a “hold” rating on the stock, said yesterday in a research note to investors.
“Hulu.com continues to gain traction, as the streaming service expects to top 1 million subscribers and generate over $500 million in revenue in 2011,” Askew wrote.
Netflix may reach almost 30 million subscribers by the end of year, and pass Time Warner Inc.’s HBO early next year, said Scott Devitt, a Morgan Stanley analyst, in a research note. Devitt has an “equal weight” rating on the stock.
In last year’s second quarter, Netflix reported net income of $43.5 million, or 80 cents a share, on revenue of $519.8 million.