Netflix is 'broken' with no fix in sight, analyst says
2011-12-02 12:55:07 GMT
Netflix has endured an exceedingly troublesome year. But things can only get worse in the coming months, says Wedbush analyst Michael Pachter.
Writing to investors in a analysis note nowadays, Pachter said that Netflix "is broken," and its call earlier this year to lift prices on customers who wish to each rent DVDs and stream video content proved to be the catalyst that brought those flaws to lightweight.
"It's clear that a price increase was necessary, and equally clear in hindsight that a 60 p.c increase on the hybrid client was too much," Pachter wrote to investors. "Whereas we suppose that the company would have seen some client defections and trade-downs at any price purpose, it is clear to us that the defections and trade-downs would are less dramatic had the worth increases been smaller."
But the damage is already done. According to Pachter, by year's finish, Netflix can show a loss of 11 million "hybrid" customers that previously rented DVDs and streamed video content. He said he believes that 7 million of these customers can have traded down to the streaming-solely possibility, whereas another 4 million will have "quit the Netflix service altogether."
Furthermore, Pachter said that Netflix can need to attract fifteen million streaming-only subscribers to form up for that revenue shortfall--an not possible goal within the close to-term, even though Netflix continues to expand internationally.
Netflix's international growth started last year when it offered its streaming service to Canadian customers. Latin America customers got a style of Netflix earlier this year. In early 2012, Netflix can supply its streaming service to customers in the U.K. and Ireland.
Although Netflix has said that its international enlargement is central to its growth, Pachter said he believes the company is following a technique of "growth the least bit costs" without considering the impact its world growth may have on profitability.
"At a minimum, we have a tendency to expect Netflix to lose $a hundred million internationally next year, and we tend to think that the figure could rise to as a lot of as $250 [million] to $three hundred million, based mostly upon its Q4 steerage," Pachter said.
Those losses will grow out of rising content prices. Pachter argued that Netflix can pay a further $two hundred million to $four hundred million for international rights to streaming content next year, which should push its worldwide content-streaming prices to between $one.3 billion and $2 billion. Netflix paid $800 million for streaming content this year.
Last month, Netflix reported that it lost 810,00zero subscribers in the third quarter and said that it expects to post a international net loss next year. Those losses and an increase in content prices have affected Netflix's money coffers so dramatically that the company was forced to raise $four hundred million earlier this month by means of a stock sale and private placement of convertible notes.
However $four hundred million would possibly not get the task done. In an exceedingly note to investors last week, Pachter said that Netflix ended the third quarter with $thirty sixsix million in money and short-term investments. The corporate's short- and long-term liabilities, but, "totaled roughly twelve times money and short-term investments at the top of the third quarter."
All that might turn into a nightmare scenario for Netflix in 2012, Pachter said. He estimated that Netflix's losses may hit 35 cents per share--concerning $18 million--next year, but seen that the "estimate could convince be exceedingly conservative" and rise to as a lot of as $a hundred million.
Although Netflix is not so willing to sound the alarms simply yet, rebuffing calls to provide 2012 performance estimates, the company did acknowledge in a very Securities and Exchange Commission filing earlier this month that if it cannot flip things around, times can be powerful.
"If we are unable to repair the injury to our complete and reverse negative subscriber growth, our business, results of operations, together with money flows, and money condition can still be adversely affected," Netflix said.
Shareholders seem to have very little faith in Netflix's ability to repair itself. Over the past six months, the corporate's stock is down seventy five p.c. As of this writing, Netflix is trading at $sixty five.eighty six, and Pachter believes it might hit $45 per share among the following year.
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