Analysis: Pricing hit unlikely to deter Netflix growth

By @ibtimes on

Netflix Inc's star darkened briefly this week after a rare stumble on pricing incensed investors and triggered an unusually dim growth projection.

But longer-term, Wall Street remains enamored of a company expected to ride an expansion beyond U.S. shores and a bigger streaming push that will cushion rising content-acquisition costs.

The company surprised investors by projecting a pause in its normally explosive subscriber growth, sending its shares plummeting as much as 10 percent on Tuesday.

Yet many industry experts and analysts accepted Chief Executive Reed Hastings' view that the slowdown is a mere hiccup before user-growth returns to year-over-year increases.

There is certainly plenty of room in the market for them to grow, Gartner analyst Michael Gartenberg said.

The new prices still represent a good value for consumers, who are increasingly turning a wide array of Internet-connected devices to watch television and movies, he said.

Still, a few analysts, including Wedbush's Michael Pachter and Morgan Stanley's Scott Devitt, sounded a note of caution on Tuesday, echoing concerns Netflix had come too far too fast.

Netflix shares were trading nearly 800 percent above levels in early 2009 and the stock has drawn heavy short interest. Reuters Starmine data ranks the stock higher than 86 percent of the stock in its group in how vulnerable it is to a short squeeze.

Devitt expects Netflix shares to exhibit weakness relative to its peer group over the next three months.

Confusion around the impact to the long-term subscriber growth trajectory in the U.S. market will linger on investor minds, Devitt said in a research note, reiterating an equal-weight rating on Netflix shares.

Wedbush's Pachter, who has rated Netflix underperform for more than a year, thought the company overestimated the number of people who would trade up to costlier plans, which separate costs for DVDs-by-mail and streaming plans. Subscribing to both services will cost more.

Pachter's current 12-month price target is $110, up from his previous $100 target, but far below current levels.

Apart from the price increase, some say the company -- despite touting an international expansion just getting in gear and more revenue for streaming offerings -- will find content increasingly costly as it shores up its library to compete with the likes of Amazon Prime, Hulu and even Wal-Mart's Vudu.

Their biggest challenge is their content costs are escalating dramatically, Pachter said.

SOME RAISE PRICE TARGETS

Netflix said on Monday it would essentially end the third quarter with the same number, or slightly more, subscribers it had at the end of the second quarter. The company expected cancellations following a vocal backlash over a price increase as high as $6 a month for some customers.

Some analysts see room for its shares to rise further.

Even Barclays analyst Anthony DiClemente, who lowered his Netflix price target to $285 from $315 on Tuesday, kept an overweight rating and urged investors to take advantage of any weakness.

Netflix continues to execute very well, he said, adding he was optimistic about plans to expand to Latin America later this year and another market early next year.

The company that started sending DVDs by mail in red envelopes has quickly built a streaming service offering movies and television shows. It has grown to 25.6 million subscribers, more than Comcast Corp, the largest U.S. cable company.

Cancellations from the higher prices will be more than offset in the fourth quarter by a gain in average revenue per user, Credit Suisse analyst John Blackledge said in a research note. He raised his price target to $310 from $280.

We view weakness on the results as a buying opportunity, he said.

CEO Hastings said the fourth quarter would show a return to year-over-year growth of new subscribers. The higher pricing will help the company secure more streaming offerings to attract new customers.

Fewer people are canceling than we expected. Our deals are coming together, Hastings said in an interview.

Netflix shares fell 5.2 percent on Tuesday to close at $266.91 on Nasdaq.

(Editing by Edwin Chan; editing by Andre Grenon)

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