Tuesday, October 25, 2011

Netflix (NFLX) stock plummets; analyst calls its model 'unsustainable'

If Netflix was a TV series, people would probably be saying it has "jumped the shark." Despite announcing results on Monday which surpassed "The Street's" view, the stock dropped more than one-third on Tuesday.

Netflix (NFLX) closed on Monday at $118.84. At the time of this writing the stock is at $77.80, down 41.04 or 34.53 percent.

Revenues were $822 million and earnings were $1.16 a share. That looks good, right? After all, "The Street" (depending which version of The Street you ask) was expecting revenues of about $811 million and about $0.94 a share.

That's not the big problem, as the company has been stumbling ever since it announced it would split its DVD and streaming service plans, amounting to an increase to $15.98 from $9.99 for a combined DVD + streaming plan. It also announced it was going to totally split the DVD service into a spin-off, Qwikster, but quickly cancelled those plans after a backlash.

It's not just the changes to its pricing model that is causing investor angst. Netflix now has a number of other competitors to video streaming, including the now Dish Network-owned BlockBuster, Amazon.com, Hulu, and even YouTube.

Netflix ended Q3 with 23.8 million total subscribers, which was slightly little lower than the guidance of 24 million the company had offered last month. Also problematically, NFLX believes that it won't see much subscriber growth in the next quarter, saying "we do anticipate that total U.S. unique subscribers will be slightly up in Q4."

The company's stock has plummeted since July. On July 13, the stock closed at $298.73 after reaching a high of $304.79.

Even worse, at least one analyst believes that the company that was central to turning BlockBuster into has-been has an unsustainable model. Janney Capital Markets said, in a note to clients, "We believe the [Netflix] model is unsustainable, as the company faces rising costs that it hoped it could pass onto its [subscribers], who appear unwilling to do so." The brokerage also cut its rating on the stock to "sell."

That was just the start of the analyst bad news for Netflix. JP Morgan downgraded the stock to "neutral" from "overweight," and slashed its price target from $205 to $67. Citigroup, meanwhile, downgraded the stock to "neutral."

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