Analyst Calls Netflix a 'Broken Story' as Stock Gets Hit With Wall Street Downgrades
After the company's third-quarter earnings report, one observer says "the Netflix model is unsustainable," while Suquehanna Financial's Vasily Karasyov speaks of a "nuclear winter" and says the latest results "put to rest the bull case on Netflix."
NEW YORK - Netflix shares are looking to open well below the $100 mark Tuesday as a couple of Wall Street analysts slapped downgrades on the stock following worse-than-expected third-quarter subscriber losses and forecasts for continued financial losses.
Susquehanna Financial analyst Vasily Karasyov downgraded the stock from "neutral" to "negative" and slashed his 12-month price target from $124 to $60 in a note entitled "The End of the Road."
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"Looks like the nuclear winter scenario is playing out for Netflix," he wrote. "Subscriber base expansion in the U.S. appears to be minimal and losses from international launches are weighing on profitability. We think third-quarter results combined with fourth-quarter guidance and comments on 2012 put to rest the bull case on Netflix as we know it."
He added: "Netflix stock may be transitioning from the momentum stock category into the broken story basket."
Karasyov expects fourth-quarter U.S. net subscriber additions to decline 80 percent from the year-ago period, "implying total subscriber base growth of only 2 percent quarter-over-quarter, the slowest pace since the second quarter 2008." And he added: "We believe the challenging trend will carry well into 2012 until a very easy comp in the third quarter breaks the pattern."
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Janney Montgomery Scott analyst Tony Wible also downgraded Netflix shares from "neutral" to "sell" again and cut his fair value estimate on the stock in half - from $102 to $51.
"The new baseline of sub metrics is troubling, management credibility has crumbled, international adoption is weak (as we suspected), content costs are mounting and it is clearer that the DVD business accounts for the vast majority of profits," he wrote. "Management has failed to rebuild faith in the stock, which is still expensive and mispriced by value standards."
Wible's bottom line: "We believe the Netflix model is unsustainable, as the company faces rising costs that it hoped it could pass onto its subs, which appear unwilling to do so."
Among other analyst reactions, Lazard Capital Markets analyst Barton Crockett maintained his "neutral" rating on Netflix shares, but spoke of a "mega-reset" for the company.
Wedbush Securities analyst Michael Pachter also maintained his "neutral" stance, but cut his price target from $110 to $82.50. A third-quarter outperformance in earnings was "overshadowed by subscriber attrition and weak 2012 earnings per share guidance from international expansion" costs, he said.