Netflix Shares Plunge on Disappointing Third-Quarter Results

Netflix matched revenue and bested earnings expectations in the third quarter but disappointed investors who were hoping for a larger number of additions to its U.S. streaming business.

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Netflix was expected to earn about a nickel a share, down 97 percent from the $1.16 it earned per share in the year-ago quarter -- and it posted 13 cents. Its revenue rose 10 percent to $905 million, as expected.

But the company added just 1.16 million U.S. streaming subscribers in the third quarter and 700,000 internationally. That metric -- announced Tuesday along with third-quarter earnings -- spooked investors, who were selling the stock in droves during the after-hours session.

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Three months ago, Netflix estimated it would add between 1 million and 1.8 million new streaming subscribers during the quarter. The company warned that if it wasn't near the high end of that range, then it would be "challenging" to reach its goal of adding 7 million streaming subscribers in the U.S. this year. The company, therefore, lowered its projection Tuesday to 5.4 million new streaming subscribers in the U.S. this year.

Overall, Netflix ended the quarter with 23.8 million streaming subscribers in the U.S. and 4.3 million internationally. Its DVD business lost 630,000 subscribers to 8.5 million.

Shares of Netflix rose 35 cents on Tuesday to $68.23. Netflix stock has sunk 80 percent in the past 15 months as investors worry about costs associated with acquiring content for streaming and whether the company can raise monthly fees without chasing away too many subscribers.

The stock was dropping as much as 17 percent after the closing bell.

In his letter to shareholders, CEO Reed Hastings discussed strategy for original content and addressed competition from Amazon, HBO and, in particular, Hulu.

"Hulu operates in Japan and the U.S. and is a joint venture owned by News Corp., Disney and Comcast," Hastings wrote. "While there are now around 2 million Hulu Plus members in the U.S., the ownership of Hulu makes it a wild card in terms of future evolution as a global competitor. We believe, in terms of U.S. viewing, Hulu is currently our closest competitor."

On original programming, Hastings said the goal is "to produce unique and compelling serialized content for a cost comparable to similar licensed exclusive content."

Netflix  is in "full production" of its second season of Lilyhammer as well as three original series that will debut in 2013: House of Cards, Hemlock Grove and Orange Is the New Black. It also will have a new season four of Arrested Development next year.