Netflix downgraded on potential 1Q profit pressure from upfront costs from bump in subscribers

Tuesday, December 1, 2009

Ahead of the Bell: Netflix downgraded on 1Q risks

PHILADELPHIA — Higher marketing costs from an expected ramp up of subscribers could pressure Netflix Inc.’s first-quarter earnings as well as the stock’s recent run up to near 52-week high levels, an analyst said Tuesday as her downgraded the stock.

Merriman analyst Eric Wold cut his rating on online video rental company to “Neutral” from “Buy.” He said that the $100 price for both Microsoft Xbox 360 and Sony PS3 video game consoles in the summer — both offer Netflix streaming — should continue to bring in movie rental subscribers.

While gaining more customers is good for Netflix in the long run, in the short term it has upfront marketing costs that would pressure earnings in the first quarter. Netflix, based in Los Gatos, Calif., pays the console companies fees for subscribers it gets through their gaming units.

Wold is projecting net new subscribers of 2.5 million in the fourth and first quarters for Netflix from the Xbox and PS3, up from last year’s 1.64 million over the same period.

He was also concerned that Netflix management has provided analysts an outlook that was too ambitious, and the rash of coming analyst cuts in estimates will put pressure on the stock. Shares of Netflix are vulnerable because they’ve recently trended up to near 52-week highs.

But over the next 12 months, as monthly subscriber fees come in, Netflix will reap benefits especially since movie streaming will save money on renting and mailing out DVDs.

Wold raised his fiscal 2010 earnings estimate by 6 cents to $2.29 per share, and fiscal 2011 to $2.72 from $2.64. He trimmed his revenue estimate by about 1 percent for next year to $1.67 billion and by 2 percent in 2011 to $2 billion.

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